Shares of Build-a-Bear (NYSE:BBW) have been on a bit of a roller coaster ride since going public in October 2004. The shares debuted at near $25 and ran to more than $35 before settling to the current $22.51 (down over 10% as management reduced guidance on Friday). Is this just a blip on the radar screen as the company grows into a durable toy company like rival Hasbro (NYSE:HAS), or is this bear's stuffing coming out?
Management lowered 2006 earnings guidance to the low end of its previous range of $1.44-$1.53. It also stated that comparable-store sales will range from zero to down in the single digits, versus flat to up in the single digits. The comp trends are clearly disappointing, but it's hard to tell where the earnings weakness is coming from, since guidance includes some dilution from an acquisition of U.K-based Bear Factory.
The shares look tempting if current difficulties are truly temporary. Also promising is the growth still projected from a smaller 240-store base, which still could amount to over 20% annually for at least the next few years. Indeed, the company believes it can operate at least 350 stores and already has a number of other concepts in mind. (Ever wanted to Build-A-Dino?) Plus, all growth is from internally generated funds, so there's no need to take on debt. And free cash flow is still positive even after subtracting store expansion capex.
In other words, past growth has been stellar and the company is now financially strong. The concern is that the current weakness points to the concept's faddishness and that the Bear Factory acquisition is a means to mask domestic growth weakness. At only about 15 times reduced 2006 guidance, there is some downside priced into the stock, but perhaps not enough for a company with a limited history as a public company and a customer base of fickle kids. Unless you have some unique insight into which way things will go, it may be best to take a wait-and-see approach.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
