I last wrote about Build-A-Bear Workshop (BBW -2.09%) in October, calling it a "potentially explosive growth stock that you can buy for under $20." I can no longer call Build-A-Bear that -- not because it's not still a potentially explosive growth stock, but because after a monster 35% gain in November and a blowout earnings report, the stock is no longer under $20 a share.

It has skyrocketed from about $14 a share when that article was written to over $25. But it's not too late to get on board with Build-A-Bear, and its best days are likely still ahead of it. Here's why.

A woman picks out a teddy bear at a toy store.

Image source: Getty Images.

Escape from the mall 

After Build-A-Bear's strong November, the stock is now up 21% year to date. However, even after this run, the stock continues to look like a buy from a valuation perspective. In fact, shares trade at just 8 times earnings, which is too cheap for a stock that is growing like Build-A-Bear.

Despite the inexpensive valuation, this is a thriving business. The company just reported third-quarter results and grew revenue by 9.1% year over year and diluted earnings per share by 41.7%. Build-A-Bear has now posted seven consecutive quarters of year-over-year revenue growth and is on track to deliver record profitability in 2022, breaking its record previously set in 2021.

Why are shares of Build-A-Bear so cheap? It seems like the market is associating Build-A-Bear with mall-based retail, which many investors want no part of now. However, those writing off the company as a relic of the mall's golden days are overlooking the fact that Build-A-Bear is reducing its mall-based exposure by opening new off-mall locations and growing its e-commerce presence.

At this point, 35% of the company's stores are not located in a traditional mall. Build-A-Bear has opened locations at tourist destinations and even at Walmart locations. I personally became reacquainted with the brand when seeing a Build-A-Bear store within a store at the gift shop while on vacation at a Great Wolf Lodge in Pennsylvania.

Build-A-Bear will soon be opening locations at the Pro Football Hall of Fame and at Six Flags Magic Mountain. The company will have 65 third-party retail locations open at the end of the year, which allows it to "efficiently engage with customers with minimal overhead."

At the same time, the company has built out its e-commerce offerings and those sales have grown at a searing 34% compound annual rate since 2016. This dual approach of growing digital sales while shifting the mix of stores to more off-mall locations means that Build-A-Bear really isn't just a mall-based retailer anymore.

Striking the right balance

It should be noted that e-commerce sales declined year over year during the quarter, but the company noted that this was offset by more people returning to stores after the COVID-19 pandemic subsided. E-commerce sales are still more than double what they were in 2019 and the company noted that sales results from Black Friday and Cyber Monday were encouraging. 

Management is deftly striking the right balance between the in-store experience and growing its e-commerce channel. Many families enjoy going to a physical Build-A-Bear location and allowing their child to create their own bear. Management has been thoughtful about how to increase e-commerce sales without diluting the Build-A-Bear experience, which is a key part of the brand's appeal.

For example, the in-store experience caters toward families while digital sales are geared toward collectors and gift givers. CEO Sharon Price John said, "We have an emotional brand, and our stores often serve as the initial engagement that lays the foundation for a lifetime of connection."

The best days are still ahead 

Build-A-Bear is a healthy, thriving business that is posting record results. The market has overlooked it for a long time due to its association with mall-based retail, but it looks like investor perception is starting to change based on the company's solid results and the stock's strong performance over the last few months.

Management is adeptly building a strong omnichannel presence while leveraging the in-store experience that the brand has long been known for. However, at 8 times earnings, the stock still has plenty of room for additional upside as more investors come around to Build-A-Bear's story.