Shares of "make your own stuffed animal" specialty retailer Build-A-Bear Workshop (NYSE:BBW) fell nearly 10% yesterday after weak fourth-quarter sales sent bearish shareholders into hibernation. Customers also appear to be avoiding the stores, but other than that the stock is worth keeping on your watch list.
Results released yesterday ended a complicated year in which Build-A-Bear digested U.K. rival Bear Factory and took a number of related charges; realized a gain as it changed the way it tracks and redeems customer loyalty programs; and transitioned a distribution center. In other words, it's difficult to discern just how well the company's stores are performing.
What investors do know is that same-store sales trends continue to be weak. Comps fell 6.5% for the year in North America and are expected to be flat to slightly down in 2007. Stores that have been open for more than five years performed the best but still saw negative sales numbers. As a result, Build-A-Bear is relying heavily on new stores to keep total sales moving in a positive direction.
There could be better news on the horizon as the company recently started a couple of movie licensing partnerships to offer well-known fluffy movie stars, such as Baby Mumbles from the penguin film Happy Feet. Mumbles was a big hit during the fourth quarter, according to Build-A-Bear's management -- so big that it was unable to keep up with demand and turn comps around. Mumbles will return to the store in March, and DreamWorks' (NYSE:DWA) Shrek, accompanied by his friends, will join the bears this spring, in preparation for his third movie.
Will Mumbles and Shrek be enough to get comparable sales moving in a positive direction again? It's hard to tell at this point, but during the earnings conference call management highlighted a number of other initiatives to improve comps. It will be adding television advertising and focus even more on repeat customers who collect different stuffed animals sold at the stores.
In the meantime, Build-A-Bear will continue to open new stores: it plans 37 additional namesake stores in 2007 with the 270 company stores already in operation. It's targeting 19% total sales growth for the year and a similar improvement in earnings. Fortunately, the company also generates strong operating cash flow and has no long-term debt; it is able to grow via internally generated funds.
With the current drop in the stock there is some downside built into the shares. Additionally, Build-A-Bear is a unique retailing concept. Management doesn't consider itself a traditional toy company such as Hasbro (NYSE:HAS) or Mattel (NYSE:MAT), because kids have the opportunity to build their own stuffed animal, and there are few other retailers that allow children the opportunity to do so.
Unfortunately, that uniqueness isn't working to the company's advantage right now. It may take some time for comps to improve, but if they do there could be enough upside to awaken any bearish investors who may be overlooking Build-A-Bear's growth prospects and cash-generating abilities.
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Fool contributor Ryan Fuhrmann has no financial interest in other company other mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
