For a company that’s known by almost every family in America, there’s a surprisingly small amount of people that know Build-a-Bear Workshop is a stock. This means even fewer people are actively paying attention to what the company is doing to change its footing and competitive stance, leading to a lack of corporate information being properly distributed. For a while, Build-a-Bear, at least behind the scenes, has been working on adapting its use case to appeal to a broader demographic range. This change in marketing, which can be seen visibly in most physical locations that I’ve been to, encourages adults to use Build-a-Bear for more generalized gifting purposes. Considering 26% of end-users are currently teens and adults, this change has seemed to gain traction. However, with a majority of end-users still eight years old or younger, a strategic initiative of the company still appears to be broadening the age demographic of their end-users towards older customers and limiting reliance on kids to generate sales. Their pretty quiet announcement of HeartBox, a subsidiary specifically made to give bear-inspired gift boxes, is the most explicit announcement of their strategic shift to date and something worth looking into in more detail.
What is HeartBox?
HeartBox is a new subsidiary of Build-a-Bear Workshop that specializes in providing gift boxes with themed teddy bears that can be customized with up to a 20 second recorded message that the customer can make. So far, there are four different types of gift boxes available to purchase: Romantic, Birthday, Sunshine, and Best. These come with a bear, wristie, and gummy bears that are unique to each type of box. The boxes do have some product differentiation between them though. The romance box comes with a scented candle, the birthday box comes with a drink tumbler and party popper, the sunshine box with tea and a drink tumbler, and the best box also with tea and a drink tumbler. The romance gift box is the focal point of the page, it is clear that an older target audience is in mind for these products. While the sunshine and best boxes are much more generalized, the romance box being the most prominent featuring seems to be no coincidence with the launch of this company being on the heels of Valentine’s Day. The birthday box also serves a more direct purpose and appears to be an item that can be used year-round. It’s important to note that from the information I’ve been able to obtain so far, HeartBox seems to be an online-exclusive brand at this time, though this could be something that changes in the future.
More Money Per Sale
The potential use of HeartBox is pretty obvious, but what are the financials of its implementation? Starting with pricing, the lowest-priced boxes, best and sunshine, start at $64. This is $10 higher than Build-a-Bear’s average dollars per transaction, meaning every sale from HeartBox will raise the entire company’s DPT. Addons also raise the purchase prices, with a custom sound costing $8 to add and a scent costing $3.50, making the maximum purchase price of each box $11.50 higher than its starting price. Notably, the romantic box is priced at a premium to the other types of boxes, with its starting price of $85 being $20 higher than the next box type. This is important when considering the distribution of box sales that I have forecasted, which can be seen here:
Because of the much more structured purposes of the romantic and birthday boxes, they are, in my opinion, meaningfully more likely to generate sales than the sunshine or best boxes. The result of this sales distribution is an upward skew in the expected average selling price of a HeartBox. The analysis above, which gives a 60% chance of a customer adding a custom sound and a 30% chance to add a scent gives an average selling price per box $5.85 higher than the starting price. When accounting for the skewed sales probabilities, this gets an average expected selling price of $77.50 per transaction. This is a 43.51% premium to the average DPT of the company today, providing meaningful upside in being able to charge more for each new sale.
Financial Impact on the Company
That math is fancy and all, but what does it matter if you can’t know the impact it could have on the company? That’s why I modeled the potential revenue, EBITDA, and net income implications of HeartBox on Build-a-Bear as a whole for fiscal 2022 and 2023. The assumptions that went into this forecast are as follows:
100,000 units are sold in 2022 and 125,000 units are sold in 2023
The average selling price in 2022 is $77.50 and increases by 5% in 2023
Gross margin is forecast at 55% for both years
SG&A as a percent of sales is forecast at 35% for both years
Interest and Depreciation & Amortization are negligible
EBIT is about = to EBITDA with a margin of 20% in both years
Tax rate is forecast at 25%
For the logic on these assumptions, the EBITDA margin is forecast to be the same as my forecast for the Bear ATM partnership with Hudson. While there will be higher fixed costs for this venture, the lack of a need for physical-location staff limits costs, as does the fact that they do not have to give any cut of the revenue or profits to a third party because they are using all of their IP. With the company currently forecast to generate an EBITDA margin of 16% in fiscal 2021 and higher in 2022 as raw material cost pressures ease, this margin forecast may be conservative. I can understand eyebrows being raised at “100,000” sales in one year, but keep in mind the whole company averages 4-5 million sales annually today. A small fraction of this being achieved by leveraging their brand recognition and strategic marketing is quite plausible in my mind, especially with the expansion of the use case. I view Valentine’s Day, anniversaries, end-of-year holidays, birthdays, and Mother’s/Father’s Day as key opportunities for HeartBox to generate sales. The tax rate is taken from my company-wide tax assumption, and interest and depreciation are assumed negligible due to the lack of physical presence and debt, though any fixed assets involved in the sales process could be depreciated. All of these assumptions result in the following income statement forecast for 2022 and 2023:
From this, it can be assumed that a successful rollout of HeartBox would be quite beneficial to Build-a-Bear as a whole adding about 2% of incremental EBITDA in fiscal 2022, and about 2.4% in 2023 as sales grow faster than the company’s other segments. This, however, neglects an important component of HeartBox: the fact that it will cannibalize some of Build-a-Bear’s existing sales. People already go in person to make a bear or order one online for gifting purposes. Launching a company specifically for gift boxes will certainly cannibalize some of these sales. To include this in my forecasting, I assumed the following for cannibalization:
1% of current 2022 and 2023 sales will be lost to cannibalization
EBITDA margin of lost sales is 17.71%, which comes from the 2022 companywide EBITDA margin assumption
2022 sales are forecast at $445 million and increase by 7.5% in 2023
I should note that if you take the current DPT of $54, this assumes that the company will lose 82,407 sales in stores/online for every 100,000 sales it generates with HeartBox, which can be expressed as 0.8247 sales lost for each sale generated by HeartBox. While still a net positive, I believe it likely that this is too harsh on the number of sales lost, but leave this in my model as a factor of conservatism. When factoring in these assumptions, this is the net benefit that I forecast:
Even after a harsh cannibalization to existing sales, the successful rollout of HeartBox is still likely to produce positive EBITDA for the company. While not to the same magnitude as the initial model, a 1% gain to EBITDA in 2022 and 1.4% gain in 2023 with a conservative forecast is nothing to scoff at. That would push my EBITDA forecast for 2022 from $78.8 million to $79.562 million, and my 2023 forecast from $85 million to $86.187 million, both of which are material.
Conclusion
While HeartBox and the Bear ATMs may on their own not have extreme impacts on Build-a-Bear, (combined could add $13.66 million, or 3.07% to 2022 sales if rolled out fully), they both show an important step for Build-a-Bear Workshop as a company. The company has to expand its use case to grow long-term. These new endeavors, which target adult gifting and impulse travel purchases respectively, are vital in achieving necessary strategic objectives for the company. Another important point is that HeartBox uses no third-party IP and the ATMs don’t use third-party IP for their bears. While subtle, these also help limit the company’s reliance on third-party IP to generate revenue and hype, which reduces business exposure and risk to third-party decisions, such as the delay of a movie or video game release. Having more control over IP is something that Build-a-Bear has expressed a desire for, and these initiatives both help it in that regard, though partnerships do and will remain important for the company. Overall, HeartBox appears to be another step in the right direction for a company that is looking to expand its use case and begins to put some of its past marketing objectives into an achievable form.