Most investors were cheering the bullish run in the markets Tuesday, but I was frustrated. You see, I'm still clinging to my Build-A-Bear Workshop
On Monday evening, management announced its "review of strategic alternatives," but the market found there wasn't anything strategic about it.
Buying when everyone else is selling
A key component of the Build-A-Bear program is to double its stock repurchase program to $50 million. Chief Executive Bear (yes, that's her title) Maxine Clark said the "share repurchase program is a testament to our confidence and optimism in the strength of our business model and our commitment to increase shareholder value." Considering the company's baby bear market cap of just $226 million and 2007 net income of $22.5 million, a $50 million stock buyback plan is pretty significant.
Beyond signaling that the company believes in its success, Build-A-Bear Workshop is saying that a stock buyback is the best use of its funds versus using the capital to continue expanding locations. Decelerating its new store openings from 50 in 2007 to just 25 in 2008, management plans to direct its focus to adding to the "store experience."
It also plans to ramp up its competition with its own virtual kids' world to rival the blockbuster Ganz Webkinz and will continue to strengthen international operations.
Bearable numbers?
Build-A-Bear "beared" an earnings miss last quarter. In last quarter's conference call, management said it wouldn't provide guidance until the board's strategic alternatives review was finished.
What we do know, however, is that growth has been slowing to a halt. The top line grew just 8.5% in 2007 (it was 20% in 2005 and 21% in 2006), and same-store sales dropped 9.9%. And an increase in expenses that outpaced sales growth triggered a drop of 200 basis points in the profit margin. Despite talk about potential acquirers, no takers have knocked on the door because of the dismal performance.
So the question remains: Do these numbers get us to the 69% drop in share price from the 52-week high of $31.19?
Some hope
There's no question that Build-A-Bear Workshop has work to do. Costs are rising and the company needs to tighten these expenses as revenue growth stiffens. The company is starting to get the hang of things in Europe, although it still expects a loss from those operations in 2008. However, if all goes well, I think Europe could be key to growing revenue.
I'm doubtful about how the Internet strategy will play out, especially against rival Hasbro's
All is not yet lost for Build-A-Bear. I love the fact that the company has no debt and has stashed away a chunk of cash totaling $66.3 million.
Certainly Maxine Clark and her team have a struggle ahead to regain the market's trust and build this bear back into a bull.
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