Analysis: E-commerce can’t replace the Build-A-Bear Workshop experience


Build-A-Bear ended its last fiscal year on a strong note, with improved revenue and a solid balance sheet that was unencumbered with debt. Unfortunately, while the first quarter started off well, the company was blown off course by the coronavirus crisis which forced it to close all its corporately owned stores on March 18th. As an interactive retailer with a lot of touchpoints and one where the primary customers are children, Build-A-Bear had to be extremely cautious, which is why it closed stores earlier than many other players.
The shut down of the physical retail operation had a deleterious impact on retail sales which fell by almost 44% over the prior year. Fortunately, Build-A-Bear put more effort behind e-commerce marketing, using the channel to launch its soft toy offer with characters from the “The Mandalorian” movie. During this period, online revenues rose by triple digits. However, growth did not remain at elevated levels and for the first quarter as a whole, e-commerce rose by respectable double digits.
While we see e-commerce as an important channel and have applauded the various investments Build-A-Bear has made – such as the “Workshop Wednesday” program of digital entertainment and activities – we do not believe it is a full substitute for the in-store experience, which is the company’s main selling tool and point of differentiation. This is one of the reasons why we are somewhat cautious about Build-A-Bear’s pathway out of this crisis. Although it can, and has, opened some of its stores, that does not guarantee that consumers will come back. There is a question mark over how confident parents will feel in bringing children to a shop where there are so many things to touch and where the ‘production process’ means they must linger. On top of this, at peak times, social distancing will limit the volume of customers stores can handle.
The nature of the store environment is exacerbated by the company’s exposure to malls, some of which will come back more slowly in terms of footfall than other retail locations. Fortunately, Build-A-Bear has a flexible lease stack with 120 locations coming up for review by the end of 2020 and 70% of leases expiring or coming up for review within the next three years. In our view, it is likely that the company will use these to demand rent cuts or to get out of stores which have become unfavorable.
As well as lease flexibility, Build-A-Bear also has a solid balance sheet with $21.9 million of cash and no borrowings under its revolving credit facility. Given the aggressive actions the company has taken to reduce outgoings – including the early furlough of staff and the cutting of capital expenditures to maintenance levels – this should be sufficient to see it through a difficult year ahead. Even so, the net loss of $21.2 million over the first quarter was painful and will have a negative impact on the company’s ability to invest and evolve as it comes out of the current difficulties.
Looking ahead, we believe that there is still a place for Build-A-Bear within the retail space. Its concept is popular with children and is differentiated from other retailers selling soft toys. However, the question is whether the concept remains as relevant and as popular in the post-pandemic world. In our view, the answer in the long term is yes; however, the answer for the remainder of this year is no. This short term pressure will undo most of the progress made in 2019, when the group returned to profitability and put itself on a solid trajectory for growth. However, once Build-A-Bear gets through this it can start to rebuild.

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