Burry sees value in Build-A-Bear shares as the business faces more tough quarters
He thinks the market is underestimating how much the company’s business has changed
Build-A-Bear shares have lost half their value over the last 12 months / Photo: Shutterstock.com
In a new post, Michael Burry has revisited Build-A-Bear, whose stock he called a “hot potato” after its August plunge. The famed investor now sees an undervalued business, though he acknowledges that the company could face several more difficult quarters. Build-A-Bear shares rose around 10% on Thursday, when Burry published his analysis on Substack.
Burry bought shares of Build-A-Bear, which lets customers build their own stuffed animals from scratch, in the middle of August, shortly before a weak quarterly earnings report sent the stock tumbling 27.3%. He decided to hold on to the stock and wait for detailed financial statements before reassessing his investment. In September, he disclosed that he had added to the position. In his latest analysis, Burry assessed the company using a template he developed for Scion Capital in 2006. His conclusion: the market is too focused on Build-A-Bear’s current problems and underestimates how much its business has changed.
Why Burry thinks the stock is cheap
The market’s biggest mistake, in Burry’s view, is treating Build-A-Bear as a “mall dinosaur.” The company still offers workshops where customers assemble their own stuffed animals, but its economics have changed. While one in five locations was unprofitable in 2012, at least 97% of its North American stores were profitable by 2021, Burry writes.
The company has also begun opening smaller stores and locations with partners that shoulder a substantial share of the costs. According to figures from a 2023 presentation cited by Burry, the investment in an average company-operated store paid for itself in around two years.
At the price of around $25 per share used in Burry’s analysis, the price/forward (expected) earnings ratio was around 7. Its enterprise value/earnings before interest, taxes, depreciation, and amortization ratio was below 4. The company has no financial debt, pays dividends, and buys back stock. By Burry’s calculations, the number of shares outstanding has declined by around a quarter since 2021.
Burry puts his IV15 estimate, the purchase price that would deliver a compound annual return of 15% over 15 years, at $23-32 per share, depending on the scenario. After rising to $27.48 per share on Thursday, the stock is now in the middle of that range.
What the financials show
Burry makes no attempt to gloss over the weakness in the business. Second-quarter comparable store sales fell 9.5% year over year, according to his analysis, while the direct-to-consumer segment’s margin narrowed to 21.4% from 27.8%. The company also failed to repeat a major Walmart supply program, and the management lowered its revenue guidance for the second time this year. As a previous Oninvest piece showed, the financial statements contained no large one-time write-downs that could explain the weak quarter.
Build-A-Bear ended the quarter with $14 million in cash versus $39.1 million a year earlier. The company attributes the decline primarily to share buybacks and the timing of capex.
Signs of a recovery?
Demand signals remain mixed. In an October 16 note, Northland analyst Greg Gibas cites Bloomberg Second Measure card-spending data showing that customer spending at Build-A-Bear stores fell 21% year over year in September after rising 7% in August. Placer.ai, meanwhile, recorded a 13.8% increase in visits and a 3.7% rise in the average transaction value.
The Bloomberg Second Measure indicator points to a potential 6.6% decline in third-quarter retail sales versus the roughly 3% decline reflected in the consensus. Northland cautions, however, that the indicator correctly predicted the direction of the change in only five of the last eight quarters.
Northland maintains its “outperform” rating on Build-A-Bear at a target price of $40 per share. The valuation implies around 45% upside from Thursday’s close. It values the company at around 6 times forecast 2027 EBITDA versus 9.4 times for peers (Oninvest has seen the Northland note).
The next earnings report, expected on December 3, will show whether Build-A-Bear is managing to stem the deterioration in sales and margins and whether it can deliver the earnings assumed in the valuation.
According to MarketWatch data, the stock has three “buy” ratings from Wall Street analysts. The average target price of $45 per share implies around 64% upside from the last close.
This text is for informational purposes only and does not constitute personalized investment advice.
