Business Overview and History

Build-A-Bear Workshop, Inc. (BBW) is a beloved multi-generational brand that has evolved from a mall-based, experiential specialty retailer to a diversified omnichannel company with a focus on adding "a little more heart to life." Founded in 1997, the company has carved out a unique niche by allowing guests of all ages to create their own customized stuffed animals, leveraging the interactive and personalized nature of the experience to foster emotional connections with consumers.

Over the past 27 years, Build-A-Bear has transformed itself from a single-concept retailer to a brand with high consumer awareness, positive affinity, and strong retail influence. The company's core business model revolves around its corporately-managed retail stores, which feature a hands-on, interactive experience where customers can make their own stuffed animals. In addition to the retail stores, Build-A-Bear operates e-commerce sites focused on gift-giving, collectible merchandise, and licensed products, as well as a growing international franchise business.

Since its inception, Build-A-Bear has experienced significant growth, expanding from a single store location to a globally recognized brand with over 500 company-owned, partner-operated, and franchise experience locations worldwide. The company went public in 2004, raising capital to support further growth and expansion. During the 2008-2009 financial crisis, Build-A-Bear demonstrated its resilience by maintaining profitability through disciplined expense management and strategic store closures, showcasing the strength of its brand even in challenging economic conditions.

In the years following the recession, Build-A-Bear continued to evolve its business model, expanding beyond traditional mall locations into tourist destinations, entertainment venues, and third-party operated stores. The company also developed new product categories, such as licensed character collections and gift-oriented offerings, to diversify its revenue streams and appeal to a broader consumer base that extended beyond the core child demographic.

In recent years, Build-A-Bear has strategically evolved its business model to diversify its revenue streams and expand its addressable market. The company has leveraged its brand strength to grow its brick-and-mortar retail footprint beyond traditional malls, opening stores in a range of formats and locations, including tourist destinations. Additionally, Build-A-Bear has accelerated its digital transformation efforts, investing in omnichannel capabilities, marketing and loyalty programs, and content/entertainment initiatives to better engage with consumers across multiple touchpoints.

Financials and Performance

In fiscal 2024, Build-A-Bear reported total revenues of $486.1 million, a 3.9% increase from the prior year. The company's net income for the year was $52.8 million, up from $47.9 million in fiscal 2023. Build-A-Bear's strong financial performance has been driven by a combination of factors, including the successful implementation of its strategic initiatives, the company's multi-generational appeal, and its ability to adapt to changing consumer preferences.

One of the key financial metrics that has consistently improved for Build-A-Bear is its EBITDA, which increased from $74.4 million in fiscal 2023 to $79.1 million in fiscal 2024, representing a 6.3% year-over-year growth. This EBITDA growth has been supported by the company's focus on improving operational efficiency, managing costs, and leveraging its growing e-commerce and international franchise segments.

In the most recent quarter (Q3 2024), Build-A-Bear reported revenue of $119.4 million, up 11.0% year-over-year. Net income for the quarter was $9.9 million, representing a significant 26.4% increase compared to Q3 2023. This growth was primarily driven by a 9.1% increase in net retail sales and a 43.0% increase in commercial revenue. The company's retail gross margin in the Direct-to-Consumer (DTC) segment also improved, increasing by 160 basis points to 54.2% in the quarter.

Liquidity

Build-A-Bear's balance sheet remains strong, with a cash balance of $44.3 million as of the end of fiscal 2024. The company's working capital position is also healthy, with a current ratio of 1.53 and a quick ratio of 0.77 as of the same period, indicating the company's ability to meet its short-term obligations. Additionally, Build-A-Bear's debt-to-equity ratio of 0.64 suggests a prudent capital structure, providing the company with financial flexibility to invest in its growth initiatives.

The company also maintains a $25 million revolving credit and security agreement, of which $24.75 million was available as of November 2, 2024, after a $250,000 letter of credit was outstanding. This additional liquidity further strengthens Build-A-Bear's financial position and supports its ability to fund ongoing operations and strategic initiatives.

Business Segments and Performance

Build-A-Bear operates through three main business segments:

1. Direct-to-Consumer (DTC) Segment: This segment includes the company's corporately-managed retail stores, e-commerce sites, and temporary stores in the U.S., Canada, Ireland, and the U.K. In Q3 2024, the DTC segment accounted for 92.7% of Build-A-Bear's consolidated revenue. Sales in this segment are primarily single performance obligations, with revenue recognized when control of merchandise is transferred to the customer.

2. Commercial Segment: This segment encompasses transactions with other businesses, including licensing of Build-A-Bear's intellectual properties and wholesale activities. The commercial segment generated 6.3% of consolidated revenue in Q3 2024. Revenue from wholesale sales is recognized upon delivery, while licensing revenue is recognized as licensee sales occur.

3. International Franchising Segment: This segment covers the company's licensing activities with franchise agreements in select countries across Asia, Australia, the Middle East, Africa, and South America. In Q3 2024, this segment accounted for 1.0% of consolidated revenue. Revenue from merchandise and fixture sales is recognized upon delivery to franchisees, while initial development fees are recognized on a straight-line basis over the term of the franchise agreement.

Strategic Initiatives and Growth Opportunities

Build-A-Bear's strategic focus is centered on three key areas: the global expansion of its unique experience locations, the acceleration of its comprehensive digital transformation, and the continued investment in leveraging the power of the Build-A-Bear brand to drive profitable growth.

In fiscal 2024, the company opened a net 40 new Build-A-Bear experience locations during the first 39 weeks, expanding its global footprint to over 500 stores across its three business models: corporately-managed, partner-operated, and franchise. Looking ahead, Build-A-Bear has increased its guidance to open at least 65 net new experience locations during fiscal 2024, up from the previous guidance of 50-plus net new stores. The majority of these new stores are expected to be partner-operated with smaller footprints, further solidifying its position as a leading experiential retailer.

The company's digital transformation efforts have been a key focus, as Build-A-Bear seeks to integrate its online and in-store operations to provide a seamless omnichannel experience for its customers. This includes investments in marketing, loyalty programs, and content/entertainment initiatives to drive increased engagement and purchase occasions across its consumer base.

To leverage the strength of the Build-A-Bear brand, the company has been diversifying its product offerings beyond its core plush toys, expanding into categories such as collectibles, licensing, and gifting. This brand diversification strategy has enabled Build-A-Bear to reach new consumer segments, including tweens, teens, and adults, in addition to its traditional family and child-focused customer base.

Financial Outlook and Guidance

Build-A-Bear has reported strong financial performance in recent quarters, with its Q3 2024 results representing the best-ever third quarter performance in the company's history. Based on this strong performance, Build-A-Bear has updated its guidance for fiscal 2024:

• Total revenues are expected to range between $489 million and $495 million, representing low-single-digit growth at the midpoint compared to the previous year on a non-GAAP 52-week basis.

• Pre-tax income is projected to be between $65 million and $67 million, also representing low-single-digit growth at the midpoint compared to the previous year on a non-GAAP 52-week basis.

The updated outlook takes into account continued lower-than-expected web demand, as well as ongoing wage and inflationary pressures. Despite these challenges, Build-A-Bear remains confident in its ability to drive growth through its strategic initiatives and expanded store network.

Risks and Challenges

As with any business, Build-A-Bear faces a variety of risks and challenges that could impact its future performance. These include the volatility of consumer preferences, the highly competitive nature of the retail industry, and the potential disruptions caused by macroeconomic factors, such as inflation and supply chain challenges.

Additionally, the company's reliance on mall-based retail locations and tourist destinations could expose it to risks associated with changes in consumer shopping patterns and the overall health of the retail real estate market. Build-A-Bear's ability to navigate these challenges and adapt its business model accordingly will be crucial to its long-term success.

The company has also noted lower-than-expected web demand in its recent guidance, which highlights the importance of continuously refining its digital strategy to drive e-commerce growth in an increasingly competitive online retail environment.

Conclusion

Build-A-Bear Workshop has transformed itself from a mall-based specialty retailer into a diversified, multi-generational brand with a focus on experiential retail and digital transformation. The company's strong financial performance across its three business segments, coupled with its strategic initiatives to expand its global footprint, enhance its omnichannel capabilities, and leverage the power of its brand, position it well for continued growth and value creation.

As Build-A-Bear navigates the evolving retail landscape, its ability to connect with consumers across multiple touchpoints and adapt to changing preferences will be key to its long-term success. With a solid financial foundation, a growing store network, and a focus on digital transformation, Build-A-Bear is well-positioned to capitalize on opportunities in the experiential retail market and deliver value to its shareholders in the years to come.