Build-A-Bear Workshop: The Reasons Why We Downgrade To Hold

Core Viewpoint - Build-A-Bear Workshop, Inc. (BBW) has experienced a decline in financial performance, missing both revenue and earnings estimates in the latest quarterly results, leading to a significant drop in stock price [5][30]. Revenue Performance - BBW reported a 4.4% year-over-year decline in revenues, totaling $114.7 million, with net retail sales down 3.8% and consolidated e-commerce demand falling 11.3% [6][30]. - Commercial and international franchise revenues combined decreased by 13.7% compared to the same period last year, contributing only $6.9 million to total revenues [6][30]. Store Count and Demand - Despite an increase in store count and total square footage, BBW did not see a corresponding rise in revenues, indicating weakening demand for its products [8][10]. - The number of corporately-managed retail locations increased to 317 in North America and 357 in Europe, with a total of 77 franchised stores and 97 third-party retail locations [9]. Financial Metrics - Diluted EPS fell to $0.82 from $0.98, marking a decline of over 16%, primarily due to increased selling, general, and administrative (SG&A) expenses [14][30]. - SG&A expenses rose due to higher wages, inflationary pressures, and unfavorable expense timing, leading to lower operating income [14]. Management Outlook - Management remains optimistic, projecting revenue growth for the full year at a low- to mid-single-digit rate and plans to add at least 50 new locations [13][30]. Shareholder Returns - BBW has focused on returning value to shareholders through share buybacks, spending over $9 million on buybacks compared to $2.9 million on dividends, which is covered by cash flow from operations [18]. Valuation Perspective - BBW's stock is trading at a significant discount compared to the consumer discretionary sector median, but this may not indicate undervaluation when compared to its historical metrics [21][30]. - The company is not expected to outperform the broader market in the coming months due to deteriorating financial performance and an unstable macroeconomic environment [29][30].