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In the decade leading up to 2020, Build-A-Bear Workshop (NYSE: BBW) was a business in decline. The company had enjoyed huge brand awareness for its “experiential” toy stores where kids get to create their own stuffed animals in a hands-on experience. But being a predominately mall-based retail chain for children’s toys was a hard business model to be successful with, even for a well-known brand.

To illustrate the decline, revenue for Build-A-Bear Workshop fell 15% from the end of 2009 through the end of 2019. Unsurprisingly, the stock was also down during that decade.

BBW data by YCharts.

After a decade of decline, the COVID-19 pandemic hit, and Build-A-Bear’s business hasn’t been the same since — in a good way. The company’s sales are booming, and profits have never been better.

Moreover, Build-A-Bear stock is now crushing the returns for the S&P 500. If you had invested just $1,000 three years ago, you’d have over $11,000 now. And if you reinvested your special dividends, you’d have over $12,000.

BBW data by YCharts.

In this article, I’ll dive into Build-A-Bear Workshop’s epic comeback. And I’ll try to explain what investors should expect from this stock from here. Spoiler alert: The good times could continue to roll.

How Build-A-Bear saved itself

Take this subjective statement with a grain of salt, but it seems like kids have a positive experience when they go to a Build-A-Bear store. They don’t get to go everyday. But when they go, kids leave with a toy they helped design, leaving them with happy thoughts.

Perhaps this is why Build-A-Bear — now a 26-year-old company — has such high brand awareness. Many kids went and still fondly remember the experience. And once management realized this, it motivated the team to approach e-commerce in an interesting, new way.

Rather than market to kids, Build-A-Bear’s e-commerce business is mostly for teens and adults. It’s not as much about a toy to play with but rather collectibles. And the strategy has paid off.

From 2019 through 2022, Build-A-Bear’s e-commerce demand grew more than 135%. And because of its success here, teens and adults now make up 40% of the company’s total sales.

In short, Build-A-Bear leveraged its mindshare to expand its addressable market beyond children, and sales are consequently booming. In the fiscal second quarter of 2023, which ended in July, the company generated record revenue for an eighth consecutive quarter.

There’s a secondary benefit to booming e-commerce sales for Build-A-Bear. The company uses its existing store footprint as much as possible to fulfill online orders. And this has helped expand its gross-profit margin and operating margin in recent years.

BBW Gross Profit Margin data by YCharts.

What can investors expect now?

Build-A-Bear Workshop aims to grow its revenue 5% to 7% year over year in fiscal 2023; it grew 5% in the first half of the year. And long term, I’m not sure that investors should expect anything more than this kind of small and (hopefully) steady growth.

However, Build-A-Bear stock is extremely cheap, trading at just 7.6 times its trailing earnings. Therefore, it doesn’t need much earnings-per-share (EPS) growth to likely generate some good shareholder returns.

By pointing out Build-A-Bear’s price-to-earnings (P/E) ratio above, I’ve implied that it has net profits, which it does. In the first half of its fiscal 2023, the company earned $1.57 per share. And fortunately, this business isn’t capital intensive. Therefore, it can give back to shareholders.

Build-A-Bear’s management is authorized to repurchase $35 million in stock, which is about 9% of shares outstanding at its current valuation. Moreover, management has paid out two special dividends in the past two years ($1.25 and $1.50), which it could do again in the future when it has extra cash.

In summary, if Build-A-Bear can simply hold on to the business it has now, it should be very profitable. And when it comes to profits, the management team has proven itself to be friendly to shareholders. If it buys back stock and pays dividends, then I see a path to more market-beating upside from its current price.

I also believe it’s reasonable to expect Build-A-Bear to at least hold on to the business it has right now. Consider that when its business was in decline, it didn’t decline by much. Additionally, the company is no longer declining. To the contrary, it’s produced record results for two years now; if it was just a quarter or two, I’d be more skeptical.

These factors lead me to believe Build-A-Bear’s turnaround is real, and the business can provide good shareholder returns from here.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Build-A-Bear Workshop. The Motley Fool has a disclosure policy.

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