Build-A-Bear: Dividend Stock Has Potential To Become A Long-Term Powerhouse

seekingalpha10-16

Build-A-Bear Workshop has strong financials and a debt-free balance sheet, giving it the makings to become a great long-term dividend stock.The company recently started paying a respectable dividend ...

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Catherine Delahaye This article was co-produced with Dividend Collectuh Stumbling across Build-A-Bear Workshop , a company I'm very familiar with, I didn't for once think the stock was one who paid a dividend. Honestly, I didn't even think they were a public company until recently. But looking through the company's financials, I was utterly impressed as they seemed to have the makings to become a great, long-term dividend stock. 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Catherine Delahaye This article was co-produced with Dividend Collectuh Stumbling across Build-A-Bear Workshop (NYSE:BBW), a company I'm very familiar with, I didn't for once think the stock was one who paid a dividend. Honestly, I didn't even think they were a public company until recently. But looking through the company's financials, I was utterly impressed as they seemed to have the makings to become a great, long-term dividend stock. Yes, BBW pays a dividend! Despite being public since 2004, the specialty retailer only recently started paying a consistent dividend. In this article, I discuss the company's latest earnings, fundamentals, and why they have the potential to become a great, long-term dividend stock worth holding. Brief Overview As previously mentioned, the company has been public since 2004. They were founded in 1997 and has become very popular throughout the years, mainly amongst children. Currently, they operate in three segments and have store locations globally, which I'll discuss more later in the article. The majority of their stores, however, are located in the U.S. & Canada. The company is exactly as it sounds, offering customers the option to build, and create their own stuffed animals that you can customize with various clothing and miscellaneous items. Latest Earnings Despite higher for longer interest rates, which have plagued consumers, Build-A-Bear has performed solidly, albeit facing headwinds. As a discretionary retailer, it's no surprise as consumers have felt the effects of interest rates, more so in the past year. However, there seems to be light at the end of the tunnel with the 50 basis points rate cut this past September, and this should provide tailwinds for retailers like BBW. Build-A-Bear reported their Q2 earnings at the end of August, with EPS of $0.64 and revenue of $111.8 million. While EPS saw a significant decline from $1.57 year-over-year, revenue increased from $109.2 million. Net retail sales were flat at $103.5 million, something I assume could also be attributed to cost conscious consumers feeling the effects of high interest rates. Management attributed this to the timing of product launches in-store and online, leading to sales increasing 8% in the prior year's quarter. However, the company has remained resilient and continued to perform well. Gross profit margins continued expanding, increasing 50 basis points from the previous year to 54.2%. These were flat on a sequential basis. Commercial revenue, which takes into account international revenue as well as wholesale sales to partner operators, was up 44.8% vs 2023, largely due to commercial margin expansion. Continued Expansion One metric I was impressed with is the company's continued expansion, especially into international markets. I really thought BBW was something niche located inside shopping malls. During the quarter, the company continued to expand, opening an additional 17 stores, including franchise locations. Some notable stores included two in Las Vegas, which I thought was very smart and strategic on the company's part. As a frequent visitor, Las Vegas is one of the most visited tourist destinations in the country, and I suspect they will see increased foot traffic over the coming months/years due to pent-up demand. This will likely benefit BBW as they are likely to see an increase in foot traffic as well. The city is still growing with Formula 1 racing and various sporting events such as the new 30,000 seat baseball stadium replacing the Tropicana. BBW opened locations at the Welcome to Las Vegas Gift Shops on the Las Vegas Strip. Although Las Vegas is known for its adult activities, the city is no stranger to children and traveling families. Adults may want to visit the store to buy or bring back gifts for their children at home. What better gift than a stuffed animal from Build-A-Bear, right? Outside of the U.S., BBW continued its expansion into Italy and France as well as South America, South Africa, and China. The company is on track to open 50 new locations this fiscal year, an increase from 37 in 2023. They are also currently in over 20 countries, and I expect them to continue expanding at a rapid pace over the coming years.   BBW Investor Presentation Debt-Free Balance Sheet One reason I think BBW can become a great, long-term dividend stocks is the flexibility the company has being debt-free. Aside from no debt, Build-A-Bear's cash position was also strong with $25.2 million. This gives the retailer ample room and flexibility to continue their expansion efforts as well as grow the dividend, which I'll delve into shortly. Moreover, with interest rates still remaining high, and uncertainty surrounding them due to a recent stronger than anticipated jobs report, BBW is in a comfortable position whether rates remain higher for longer or not. Dividend As previously mentioned, I wouldn't expect BBW to pay a dividend, let alone a respectable one with a forward yield of 2.24%. The company has also paid out two special dividends and frequently repurchased its shares over the past few quarters. During the 1H of 2024, management has returned significant capital to its shareholders, totaling $24 million through buybacks & dividends. In 2023, they returned $42.4 million to shareholders, which prompted them to initiate a $0.20 quarterly dividend going forward. This shows the company's confidence in their ability to generate strong cash flows going forward, which I suspect they will do through partnerships and continued expansion. In the chart below, you can see how the company's free cash flow has grown exponentially over the past 3 years. Additionally, their balance sheet allows them the ability to continue repurchasing shares, which ultimately should lead to earnings and share price growth.   BBW Investor Presentation Undervalued? With a forward P/E of just 9.18x, Build-A-Bear appears to also be undervalued. Using their earnings estimate of $3.72 for the fiscal year, this represents a growth rate of just 1.92% from $3.65 brought in 2023. But, looking out beyond 2026, earnings are expected to grow at an average rate of 10.17%. And this should lead to solid price appreciation in the coming years. For comparison purposes, BBW's forward P/E is significantly lower than the sector average of 16.94x and MarineMax's (HZO) 11.95x, further signaling the stock could be undervalued. Additionally, BBW's P/E is below their 5-year average of 10.64x. As seen by the company's strategic partnerships, store openings, and free cash flow generation, I anticipate the company warranting a higher valuation in the coming years. Wall Street currently rates them a strong buy with a price target of roughly $40, upside of 16%.   Seeking Alpha Using their earnings growth rate average of 7.28% and 4% to manage expectations and account for slower growth after, I have a long-term price target of $62.23, more than 82% potential upside! Moreover, seeing the company's growth and execution, I think this is attainable due to their rapid expansion, buybacks, and debt-free balance sheet.   Moneychimp Risks & Bottom Line But, due to the company's business model, they may not be an ideal portfolio holding, especially for long-term dividend investors. Additionally, their current yield may not be as appealing to some. As a consumer discretionary retailer that sells stuffed animals, it's likely the company can see flat or declining sales in the coming months/years. And while their fundamentals remain solid, this could lead to a decline in share price. Furthermore, a slowdown in the economy would also likely impact the company's sales as job losses tick up, giving consumers less capital to spend on discretionary items. However, with interest rates already cut by 50 basis points, and more expected in the future, this should provide tailwinds for companies like Build-A-Bear, thus positively impacting their net sales.  And as they continue to grow cash flow and maintain a debt-free balance sheet, this should aid in continued expansion, ultimately leading to share price appreciation over the long term. Due to this, along with their low, single-digit P/E, I currently assign Build-A-Bear a buy rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2475969096"}