'A hot potato': Michael Burry is growing bearish on Build-A-Bear after 2Q earnings
Build-A-Bear's management lowered its top-line guidance for fiscal 2026 to $500–525 million / Photo: Iv-olga / Shutterstock.com
On Thursday, renowned short seller Michael Burry posted on his blog that a weak quarter from Build-A-Bear – the brand that lets customers create their own stuffed animals in its workshops – had prompted him to reassess his position in the company. Following the earnings for the company's fiscal second quarter, ended August 1, its shares plunged 27.3%, its largest one-day drop ever. Burry is in no hurry to sell, however, intending to wait for the company’s 10-Q filing, which will show how Build-A-Bear’s fundamentals have changed.
Fiscal 2Q earnings
Build-A-Bear Workshop had a rough day on Thursday, Burry notes. “The stock is down nearly 11, about 28% at this writing. That triggers my 20% down rule. Do something or get off the pot,” he wrote on his blog. Burry’s 20% rule calls for reassessing a position when it falls 20% below his purchase price. He may then add to, hold, or exit the position.
By the close of trading on Thursday, Build-A-Bear shares had plunged 27.3% to $28.40 apiece. The stock edged higher in premarket trading on Friday, gaining 0.21% as of this writing.
The retailer’s fiscal-second-quarter report brought expectations down, Burry wrote. He highlighted that the management had lowered its guidance across several areas that were supposed to support the company’s growth. The clearest warning sign was a sharp reduction in its forecast for commercial revenue, which covers sales through wholesale and other partners.
“We said our total commercial segment would grow at least 20%. Now we are bringing it down to basically being flat. Pretty much all of that decline is tied back to our traditional wholesale mess. As we think about the context of guidance, we also did miss our expectation in the second quarter, and driven again by that summer trend product performance and persistent traffic pressures,” Burry quoted Build-A-Bear CFO Voin Todorovic as saying.
One reason for the guidance cut was the loss of a major Walmart program. In spring, Build-A-Bear began selling its products in more than 1,500 Walmart stores and on Walmart.com, but the partnership was not renewed for the second half of the year. The company had expected to replace those sales with other wholesale projects, but they are progressing slower than expected. Its international business also delivered weak results. International franchise revenue fell 32.8% year over year to $661,000.
The company is nevertheless sticking to its previous business plans: it still intends to open 50 or more new locations and spend $25 million on capex in fiscal 2026, an amount that Burry noted is significant for a small-cap firm.
Burry said that the situation at the company requires attention and that he sees no signs of a full-fledged turnaround. He expects the management to make more prudent decisions following the disappointing quarter. Thus, while Burry himself described Build-A-Bear stock as a “hot potato,” he has yet to make a final decision on the position.
“I am awaiting the 10-Q before deciding whether to add. However, I continue to hold the position I took not long ago. The company now trades below historic IV15, and that seems to still be true. However, I need the 10-Q to be sure. My 20% rule does not say I must act immediately or rashly,” Burry wrote.
Note that IV15 is Burry’s estimate of the price at which a stock would deliver a compound annual return of 15% over 15 years.
About the business
Build-A-Bear Workshop operates at the intersection of retail and entertainment. In its stores, customers assemble their own stuffed toys, choosing the model, stuffing, clothing, footwear, accessories, sound, and other personalized elements. The company also sells additional merchandise and licensed collections based on movies, games, and other popular franchises. It caters not only to children but also to adult buyers of collectibles and gifts.
Company-operated stores and online sales form the core of the business. Build-A-Bear also sells products through major retail chains and other commercial channels, develops its international franchise business, and opens locations with partners. As of August 1, the company had 674 locations worldwide: 379 company-operated locations, 177 partner-operated locations, and 118 franchise locations.
The company had been growing sales in recent years: fiscal 2025 marked its fifth consecutive year of record revenue, which reached $529.8 million. In the fiscal-2026 second quarter, Build-A-Bear reported revenue of $115.3 million, versus $124.2 million in the same period last year. Pretax income fell 24.1% to $11.6 million. The gross margin narrowed from 57.6% to 54.2%, while e-commerce demand declined 15.6%.
As noted above, the management lowered its guidance for fiscal 2026. It now expects revenue of $500-525 million versus its previous forecast of $530-550 million. It also reduced its pretax income forecast to $60-68 million from $72-78 million.
On Thursday’s earnings call, the management said sales had begun to improve early in the third quarter. The launch of Build-A-Bear’s Halloween collection delivered one of the strongest sales weeks in the company’s history, while its U.S. e-commerce business recorded its third-best week ever. The management also said the average transaction value remained above the level last year and that the number of items per transaction continued to rise.
What analysts say
Build-A-Bear shares have lost around 53% of their value year to date. According to MarketWatch data, the stock has four ratings from Wall Street analysts, all of them “buy.” The average target price is $51.75 per share, implying 80% upside from Thursday’s close.
