Executive Summary / Key Takeaways

• Build-A-Bear Workshop has successfully transformed from a mall-centric retailer into a diversified, multi-generational, omnichannel, and global brand, leveraging its unique experiential model and strong brand affinity.
• Recent financial performance, including record Q1 2025 results with double-digit revenue growth and significant margin expansion, demonstrates the effectiveness of its strategic pivot and operational discipline.
• Strategic expansion through varied store formats (traditional, tourist, shop-in-shop) and capital-light partner-operated/franchise models is accelerating global footprint growth and diversifying revenue streams.
• Ongoing digital transformation initiatives, focused on omnichannel integration and data leverage, aim to enhance efficiency, personalize customer engagement, and drive future sales growth across channels.
• Despite macro headwinds like inflation and tariffs, management maintains a positive outlook, guiding for record revenue in fiscal 2025 and solid double-digit pre-tax margins, supported by proactive mitigation strategies and a strong balance sheet.

The Evolution of an Icon: From Mall Staple to Global Experience Brand

Build-A-Bear Workshop, founded in 1997, began its journey rooted in the simple yet powerful concept of creating personalized stuffed animals through an interactive, in-store experience. For years, this mall-based model defined the brand. However, recognizing shifting consumer behaviors and the need for resilience in a dynamic retail landscape, the company embarked on a significant strategic evolution. This transformation aimed to leverage the inherent strength and multi-generational affinity of the Build-A-Bear brand, expanding its reach beyond its core demographic and traditional physical footprint.

Today, Build-A-Bear operates as a diversified entity across three segments: Direct-to-Consumer (DTC), Commercial, and International Franchising. This structure supports a strategy focused on reaching new people in more places with a broader array of products and experiences.

The company's history of adapting to challenges, including the "retail apocalypse," Brexit, and the COVID-19 pandemic, has forged a more disciplined and financially robust organization.

Competitive Positioning in a Shifting Retail Landscape

Build-A-Bear operates within the broader toy and specialty retail industries, competing with large manufacturers like Hasbro (HAS) and Mattel (MAT), as well as collectibles-focused players like Funko (FNKO) and other retailers, including value-oriented ones like Grocery Outlet (GO) in certain contexts. While Hasbro and Mattel benefit from significant scale and established global IP portfolios, their models are primarily manufacturing and licensing-driven, with less emphasis on the direct, interactive retail experience that defines Build-A-Bear. Funko competes more directly in the collectibles and e-commerce space, often demonstrating faster product innovation cycles.

Build-A-Bear's core competitive advantage lies in its unique experiential retail model and the strong emotional connection it fosters with consumers. This interactive process of creating a furry friend serves as a powerful differentiator, driving planned destination visits and fostering high customer loyalty, which management estimates results in a significant portion of trips being planned in advance, outpacing national retail traffic trends. While larger competitors may have cost advantages due to manufacturing scale or broader distribution networks, Build-A-Bear's niche focus allows for higher customer engagement and potentially stronger margins within its specific segment. The company's strategic shift to diversify its store formats and expand its partner-operated and franchise models also provides a more capital-efficient growth path compared to relying solely on traditional corporately-managed stores, offering a strategic response to the scale advantages of larger rivals.

The Digital Backbone: Enabling Omnichannel Growth

Central to Build-A-Bear's strategic evolution is its comprehensive digital transformation. This initiative is not merely about enhancing the e-commerce website but creating a fully integrated omnichannel ecosystem. The goal is to seamlessly connect the in-store experience with online engagement, leveraging technology to improve operational efficiency and deepen customer relationships.

Key technological advancements include the ongoing implementation of a new strategic inventory management system and upgrades to the point-of-sale (POS) system. These initiatives are designed to provide better real-time inventory visibility across the network of stores and warehouses, enabling more efficient order fulfillment, including buy online, ship from store capabilities. This operational technology aims to enhance the guest experience through faster service and broader product availability, while also improving business efficiency and data-driven decision-making. The company is also working on integrating first-party customer data to enable more personalized marketing and product offerings across all touchpoints. While the digital transformation has presented challenges, including fluctuations in web demand, management views it as crucial for long-term growth, aiming to leverage tools like AI and partnerships with companies like Salesforce to optimize the omnichannel model and expand the total addressable market.

Financial Strength and Performance Momentum

Build-A-Bear has demonstrated impressive financial performance in recent years, culminating in four consecutive years of record results. This trend continued into fiscal 2025, with the first quarter marking the best Q1 in the company's history. Total revenues for the thirteen weeks ended May 3, 2025, reached $128.4 million, an increase of 11.9% compared to the prior year period. This growth was primarily driven by a 10.9% increase in Net Retail sales and a significant 27.0% increase in Commercial revenue.

Profitability also saw substantial improvement. Consolidated gross profit increased to $73.0 million, resulting in a gross margin of 56.8%, a 260 basis point expansion year-over-year, benefiting from both retail and commercial segments due to improved merchandise margins and occupancy leverage. Income before income taxes grew 30.6% to $19.6 million, yielding a pre-tax margin of 15.3%, a notable increase from 13.1% in the prior year quarter and a significant leap from 3% in Q1 2019. Selling, general, and administrative expenses increased to $53.6 million, or 41.7% of revenue, reflecting higher wage rates, healthcare costs, and general inflation.

The company maintains a strong balance sheet and healthy liquidity. As of May 3, 2025, cash and cash equivalents stood at $44.3 million. Cash flows provided by operating activities were robust at $27.8 million for the first thirteen weeks of fiscal 2025, a substantial increase from the prior year, driven by favorable changes in working capital.

The company has a $25 million revolving credit facility with no outstanding borrowings. This financial strength supports continued investment in strategic initiatives and allows for consistent return of capital to shareholders through dividends and share repurchases. In Q1 2025, the company paid a $0.22 per share cash dividend totaling $2.9 million and utilized $4.2 million for share repurchases under its $100 million authorization.

Strategic Expansion and Diversification Bear Fruit

The company's strategic focus on expanding its footprint and diversifying its offerings is clearly contributing to its performance. The DTC segment, while facing some web volatility, saw strong store performance in Q1 2025 with positive trends across traffic, conversion, average unit retail, and units per transaction. Domestic store traffic notably outpaced the national decline. The Commercial segment, encompassing wholesale and licensing, continues to be a key growth driver, benefiting from the expansion of partner-operated locations. International Franchising also contributed positively, driven by new store openings and product shipments.

Build-A-Bear is actively expanding its physical presence, targeting at least 50 net new locations in fiscal 2025, with a significant portion being international partner-operated stores. This expansion includes a focus on non-traditional locations like tourist destinations and shop-in-shops, which now represent over a third of the total store base. The planned multi-level workshop at ICON Park in Orlando is a testament to this strategy. Product diversification is also gaining traction, with the Mini Beans collection proving successful in expanding beyond the core make-your-own plush and demonstrating potential for wholesale distribution. The company is also successfully appealing to the growing teen and adult collector market, which now accounts for approximately 40% of retail sales.

Outlook and Key Considerations

Management is confident in the company's trajectory, reiterating its fiscal 2025 revenue guidance and expecting to achieve a fifth consecutive year of record revenue. The outlook anticipates continued growth in the commercial segment (at least 20%) and contributions from new store openings. However, the pre-tax income guidance has been updated to a range of $61 million to $67 million, reflecting anticipated cost pressures.

These pressures include ongoing inflationary impacts, particularly higher wage rates and medical costs, as well as the expected impact of current tariff rates. Management estimates the net impact of tariffs and associated costs to be less than $10 million for fiscal 2025, with a greater effect anticipated starting in the third quarter. The company is actively mitigating these costs through supply chain diversification (reducing reliance on China for North America sourcing), accelerated inventory purchases, and strategic pricing adjustments. While macro uncertainties persist, including potential impacts on consumer spending, Build-A-Bear's position as a destination for special occasions and the resilience of the toy industry provide some insulation. The UK customs dispute remains a contingent liability, though management does not expect a material adverse impact.

Conclusion

Build-A-Bear Workshop has successfully reinvented itself, transforming its business model to capitalize on brand strength and consumer affinity in an evolving retail environment. The company's strategic focus on diversification across channels, consumer segments, product categories, and geographies, coupled with disciplined operations and ongoing digital transformation, has driven a period of record profitability and strong cash flow generation.

While facing ongoing macro challenges and cost pressures, particularly from tariffs, management's proactive mitigation strategies and clear investment plans for expansion and digital enhancement underpin a positive outlook for continued revenue growth and solid profitability in fiscal 2025. The company's unique experiential model and growing appeal to a broader audience provide a competitive edge. For investors, Build-A-Bear represents a compelling story of a legacy brand that has effectively adapted, demonstrating financial resilience and strategic vision to pursue future growth opportunities.