Can Build-A-Bear Workshop Bounce Back After Last Week's 16% Drop?

By Rick Munarriz Markets Fool.com

Watching a customized teddy bear being birthed at a mall store isn't as cool as it used to be. Shares of Build-A-Bear Workshop (NYSE: BBW) were one of last week's biggest losers, plunging 15.97% after posting disheartening financials for the holiday quarter.

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Revenue clocked in at $110.3 million for the 13-week period, 6.2% below the prior year's fourth quarter showing of $117.7 million. An increase over the past year in the number of both company-owned and franchised stores wasn't enough to offset a brutal 8.3% decline in comparable-store sales.

The news only got worse on the bottom line. Build-A-Bear Workshop's profit was more than cut in half during the seasonally potent holiday season. The small-box retailer posted an adjusted profit of $0.31 a share. It earned $0.64 a share a year earlier, and that was on more shares outstanding.

Companies take steps back from time to time, but this setback was completely unexpected. Analysts were modeling earnings of $0.71 a share on $126.2 million in total revenue. Wall Street pros were holding out for modest growth on both ends of the income statement, only to be let down on both fronts.

Image source: Build-A-Bear Workshop.

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Build-A-Bear Workshop seemed to be putting together a remarkable turnaround. After years of cascading sales and store closures, the chain managed to rattle off three consecutive years of positive comps through 2015. The stock would go on to more than triple -- up 220% -- in that span of time. The retailer was on track to stretch that impressive streak to four years in 2016 until December proved to be a comedy of errors.

The toy store blames sluggish mall traffic in December for its year-end slowdown. Weak customer flow forced it into aggressive discounting to generate sales that came naturally at lower markups. A shift in its marketing budgets away from TV and direct mail in an attempt to woo millennial moms with digital advertising may have seemed smart on paper, but it failed to deliver a pop in store traffic it needed to make the holidays special.

There was a spike in traffic to its website -- likely the handiwork of its beefed-up spending on digital marketing initiatives -- but technology also let Build-A-Bear Workshop down as its internal systems were unable to meet the uptick in online demand. There was also the odd phenomenon where gift card redemptions were down despite a double-digit percentage increase in the number of gift cards sold. This should be a tailwind heading into 2017 as holiday gift cards get redeemed early this year, but let's not count those teddy bears until they're stuffed.

Wall Street obviously wasn't impressed.Piper Jaffray analyst Stephanie Wissink downgraded the stock to neutral, slashing her price target from $18 to $10.50. The crummy quarterly results sting, but Wissink is also concerned about problematic trends with declining mall traffic and a shift in entertainment spending.

Alex Fuhrman at Craig-Hallum is sticking to his buy rating, but dramatically reducing his price target from $24 to $15. The sharp sales reversal in December -- Build-A-Bear Workshop's biggest month -- and the marketing stumbles are worrisome.

This isn't necessarily the end of the turnaround story. Stores remodeled with its fresh Discovery platform held up better than legacy units. Build-A-Bear Workshop also continues to explore strategic initiatives, though it will naturally be harder to smoke out a suitor if sales keep sliding into the new year. Build-A-Bear had an awful month after 47 strong ones. Investors better hope that it's truly the exception to the rule.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.