The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Build-A-Bear Workshop (NYSE: BBW).

Grin and bear it
I have nothing against stuffing bears. In fact, that's what I'm about to do.

I was initially pleased when the headline of Build-A-Bear's earnings release promised "significant improvement," but it proved to be somewhat false advertising.

True, Build-A-Bear managed to deliver a better-than-expected profit of $0.44 a share during its holiday quarter, reversing a small loss from the year-ago period. That's a good bottom-line showing, even though the cynic in me needs to point out that Build-A-Bear earned $0.48 a share three holiday quarters ago, and $0.75 a share during the final quarter of 2006.

Unfortunately, we're still talking about the same ol' Build-A-Bear as you scale the income statement. Franchise fees and sales per square foot continue to slip. Healthier gross margins, shrewd cost controls, and an uptick in Internet sales may have helped prop up the retailer's profitability in its telltale quarter, but this concept continues to fade in popularity.

Net retail sales inched $2 million higher, but that also includes a one-time $4.3 million spike fueled by an adjustment to deferred revenue related to Build-A-Bear's loyalty program. In other words, the top line continues to slide, and we see that in the 3.7% decline in same-store sales. European sales fell even harder, shifting foreign expansion from a potential catalyst to a definite anchor.

Comps posted a fluke uptick during the third quarter, prompting the company to put itself up for sale two months ago. However, now that we've realized that this teddy bear has no clothes, I can't imagine too many potential buyers lining up -- especially when they know that Build-A-Bear will continue to get cheaper.

Store-level sales peaked in 2004. Things then began to fall apart after the company posted slightly negative comps in 2005. They've only gotten worse since then.


Same-Store Sales Growth

2006 (6.5%)
2007 (9.9%)
2008 (16.8%)
2009 (13.4%)
2010 (2.0%)

I'm sorry, but it's hard for me to get excited about e-commerce growth when the average store is selling nearly 42% less than it was five years ago. In fact, if Internet sales are all that investors have to look forward to, they'll entirely invalidate the concept of watching customized bears get created stuffed in person.

Build-A-Bear is no longer the birthday-party hotbed it was nearly a decade ago. The company’s healthy balance sheet and sharp cost controls will keep it alive, but I think those sticking around for a conceptual renaissance or a buyer at a healthy premium will be bear-y disappointed.

Still, as I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

lululemon athletica (Nasdaq: LULU)
Kid-centric retail concepts are a topsy-turvy land these days. Children's Place (Nasdaq: PLCE) posted an 8.8% plunge in stateside comps in its latest quarter, but Abercrombie & Fitch (NYSE: ANF) just scored a 9% spike in same-store sales at abercrombie kids. They're a fickle lot. If you can't make money tracking where the kids are going to in the mall, follow the moms -- straight to lululemon.

This seller of upscale athletic apparel isn't just about yoga moms anymore. Comps continue to grow at a double-digit pace, and lululemon has beaten Wall Street's quarterly profit targets by 25% or better over the past year. The trendy outfitter also recently raised its guidance for the significant holiday quarter, boding well for next month's quarterly report.  

Disney (NYSE: DIS)
I've singled out the family entertainment giant as a logical Build-A-Bear buyer in the past. It would provide the branding injection that Build-A-Bear sorely needs, and it's hard to question Disney's ability to remain relevant and timeless for decades. Disney's consumer-products division scored a 24% spike in revenue this past quarter. There was improvement in comps and margins at its North American Disney Stores, but the key drivers here were the Toy Story 3 toy sales and its Marvel acquisition. Disney has the deep bench of beloved proprietary characters that Build-A-Bear will never have. (Nasdaq: AMZN)
If Build-A-Bear's 13% growth in e-commerce sales looks impressive, try on the 36% surge at the world's largest online retailer during the same three months. Amazon's lofty valuation and Kindle-related margin contraction are problematic in the near term, but there's no doubt that Amazon will continue to thrive. Build-A-Bear? Not so much.

I'm sorry, Build-A-Bear. You're just too soft.  

lululemon athletica is a Motley Fool Rule Breakers selection. and Walt Disney are Motley Fool Stock Advisor recommendations. The Fool owns shares of lululemon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story, except for Disney. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.