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• Getting Rich Off Teddies 🧸

Getting Rich Off Teddies 🧸

I thought TY Beanie Babies were the only teddies that had any chance of making me rich. Turns out I was wrong.

I think I stand a better chance with Build-A-Bear Workshop. Yes. The teddy bear company you’ve seen in your local shopping centre & recorded a heartfelt message to go inside your bear that plays every time you squeeze them…. just me?

Anyway, it looks like they’ve been stuffing plush into toys & cash in to duffel bags. I want a part of it.

Here’s why it needs your attention as an investor. 🧸💰️ 

Since August BBW is up over 50%. This past Friday alone, it was up over 5% for the day. So why is this retail stock seeing such a boom?

It’s all about free cash flow (FCF). Since 2019, BBW has generated $200 million in FCF. That’s almost 50% of its market cap. That’s a huge number for a small retailer!

For context, everyone’s stock sweetheart Nvidia has a free cash flow yield of about 1.5%. BBW is over 6%! That means teddy bears are over 3x more efficient at turning their market value into free cash than the latest AI trend!

(Yes. I know there’s nuance. I’m just trying to make a point about how impressive what BBW is doing)

In short, they’re making a ton of money from their operations at a very cheap rate. That gives them the flexibility to return capital to shareholders through buybacks & dividends while still growing the business without a ton of debt.

Undervalued & Overlooked 👀

This is where we make our money. Buying things that undervalued & overlooked. Under-loved & under-priced.

BBW is trading at a price-to-economic book value (PEBV) ratio of 0.82.

Hyphens & fancy words give me a headache so what does that mean?

It means the market is pricing in an expectation that the company’s profits decline by 18% in the future. If that’s a reasonable expectation then there’s no value here. But does that seem reasonable?

No, not really.

BBW has grown its Net Operating Profit After Tax (NOPAT) at a ridiculous rate of 72% per year since 2019. Even though there’s been a slight dip in profitability recently (NOPAT for the trailing twelve months is $54.81M, down from $58.98M last year), pricing in an 18% drop seems a bit dramatic. Especially with a track record of half a decade of insane growth.

In my opinion, the market is grossly underestimating BBW’s earnings power. That’s good news because it means I get to buy an undervalued asset.

I am aware that it is only undervalued on the basis that I’m right about there not being an 18% drop in NOPAT so what are BBW doing that gives me confidence to back them?

What the Future Holds 🔮 

First of all, the track record of profitability helps me sleep at night. Management are the same & they clearly know what they’re doing, so that’s one thing.

And they’re also aware that you have to adapt to keep growing. You can’t just keep doing the same thing forever (mostly, anyway).

They’ve moved beyond just shopping centres. They’re opening stores in tourist destinations & integrated with big retailers like Hamley’s.

They’ve also been expanding their e-commerce & digital sales which should help protect them if the “death of the high street” continues. Promotions like “Online Exclusives” drive customers to online stores to make sure they’re not missing out. I mean how would you feel if you missed out on a cuddly capybara?

I’m not ashamed to be one of the 318 who have viewed that in the last 24 hours. 😅 

Sprinkle in partnerships with brands like Pokémon, Disney, & Nintendo driving revenue growth from both kids and adults & I think you can start to see why I think there’s no fear of an 18% drop, right?

Risks You Have To Know ⚠️

All that said, it is important to keep a balance view. So if we had to play devils advocate, what would the risks be?

1/ Shopping Centre traffic - A lot of BBW’s revenue still relies heavily on physical store sales, especially in shopping centres. As e-commerce grows high street & shopping centre foot traffic keeps falling. That could be a problem. It is being addressed as they target more digital sales but it doesn’t quite have the same magic as putting a bear together yourself in store.

2/ Marketing changes - As they shift even further on to digital sales, they’ll need to shift how they’re targeting customers. Digital marketing campaigns will need to hit the mark to make sure revenue growth doesn’t suffer.

3/ Competition: Children’s toys & games is always a super competitive space. BBW is up against competitors like Vermont Teddy Bear & Funko, not to mention other forms of entertainment that draw kids & families away from stores. But this isn’t new & they’ve been fine so far so….

BBW might look like a simple toy retailer when you walk past on the high street but under the surface, it’s a cash-generating machine that’s being undervalued by the market.

Risks considered, the potential upside is too good for me to ignore. I think a fair value would be closer to $45-$55 which would be a gain of up to 55%.

If that comes through, I’m not sure about a teddy. I’ll get this money box to put my profits into instead. 🧸💼

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That’s all! See you same time next week 👋 

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️