BBW

The following is a statement issued by Dave Kanen, who serves as Managing Director at Kanen Wealth Management:

To the Members of the Build-A-Bear Board of Directors,

Kanen Wealth Management and its affiliates are one of the largest shareholders of Build-A-Bear with a 6.5% stake. We believe the company has an extraordinary opportunity to allocate capital in a way that would create significant value for long term shareholders.

We have obtained a professional valuation of the company’s owned distribution center which suggests a valuation in a sale lease back of at least $31M and an associated lease expense of ~$1.8M. BBW has the opportunity to sell (and lease back) this asset at ~17.2x earnings and repurchase stock at ~3.2x EBITDA, this would be accretive to earnings per share by ~11%.

Furthermore, BBW has significant net cash today and is likely to improve to ~$75M in net cash within the next 6 months. Meaning at a 15% premium to today’s price, BBW could retire 6.2M shares just by monetizing its distribution center and returning its year end net cash to shareholders via share repurchases. This 6.2M share repurchase would allow shareholders to own 67% more of the BBW business (shares outstanding reduced by 40%) and be enormously accretive. Importantly, this would leave BBW with a very strong balance sheet, continued ability to invest all future FCF back into the business, and in our opinion is unequivocally the best way the company can allocate its capital to create value.

The below demonstrates the value creation this move would create, along with the ensuing probable fair value range of BBW.

Share Repurchase Scenario - Sale lease back plus YE net cash used for share buybacks
		EV/EBITDA multiple
		6x			6.5x			7x
	55	$	35.5		$	38.4		$	41.4
Normalized EBITDA	62.5	$	40.3		$	43.7		$	47.0
	70	$	45.2		$	48.9		$	52.7
	% Change Vs. Current Stock Price
		EV/EBITDA multiple
		6x			6.5x			7x
	55		137	%		156	%		176	%
Normalized EBITDA	62.5		169	%		191	%		214	%
	70		201	%		226	%		251	%

This board owes shareholders an explanation as to why the company is not acting on this opportunity, if there is a capital allocation path (for the $75M YE net cash plus $31M RE asset) that creates more value with less risk, then the management and the board should enlighten shareholders – the owners of the business. Regarding M&A, we likely cannot buy a business as good as our own for less than 3.2x EBITDA and one that carries no integration risk like that of share repurchases. Does it make sense to hoard $75-100M+ in net cash on the balance sheet while ignoring the value creation highlighted above?

The majority of the members of the BBW board own a minimal number of shares and we estimate that 95%+ of the shares owned by the board have been granted (i.e. shares that this board has handed to themselves) as opposed to putting real skin in the game.

We find it disturbing that directors with very little skin in the game Lord their “ill-advised authority” over shareholders who are the TRUE OWNERS of the company. Both management and the board are saying “GOOD ENOUGH FOR THEE BUT NOT ME” by your continued dumping of shares. It’s grotesque and abusive! If an investor looks at a chart of the stock over the last 8 years under Sharon John’s tenure, there is little to show. I would call it mediocrity. In our opinion, the CEO SHARON JOHN IS NOT NUMBERED amongst the winners when it comes to shareholder returns which is the ultimate scorecard and mandate. As a result, in our opinion, she’s a 5 on a scale of 1-10. We have made numerous recommendations over the past 3 years, both while I was a director and investor. Some of them are: 1) a meaningful entry into the Pet toy market (a multibillion-dollar opportunity) 2) a 3rd party retailer relationship with a partner that has 100’s of locations for a “store within a store” such as Chuck E. Cheese 3) Sale lease back with a large stock tender and 4) partnerships with elementary education providers.

In my opinion, it seems as though our CEO cannot execute an idea that’s not her own. Rather, exhibiting signs of egotism at the expense of results and to the detriment of shareholders. We are calling for an end to this seemingly childish behavior, or if this is a mere coincidence, to “get after it”! Thus far, your growth initiatives are “incrementalist” at best and not transformative.

In summary, our message for management and the board is to take transformative action immediately as we have laid out above. We welcome other shareholders along with us, to express their views, and equally hold BBW management and the board accountable.

Sincerely,

David Kanen

Kanen Wealth Management, LLC.

dkanen@kanenadvisory.com