Build-A-Bear Builds on the Basics

By Angela Moore

NEW YORK (Reuters) - Thirty years ago, the toy industry was basically a collection of dolls, plush bears, building sets, Slinkys and electric trains.

Today -- with the state of play radically transformed by ultra-violent video games, high-tech interactive toys that remember your name, and Beyonce and Lindsay Lohan fashion dolls -- nothing seems the same.

But one thing hasn't changed. Don't bet against the bear.

Here's proof: The stock of Build-A-Bear Workshop Inc. (NYSE:BBW - news), described as "a beary special place," has increased 85 percent since it went public last fall by offering a novel concept to a stagnant industry.

"We don't think of ourselves as a toy company," Maxine Clark, founder and chief executive of Build-A-Bear, told Reuters. "We sell an experience."

The consumer's experience -- creating a soft toy and customizing it -- involves selecting an animal skin, stuffing and stitching, and choosing outfits with accessories such as shoes, glasses and cellphones.

Clark's company, whose first store opened in 1997, has 170 locations in 48 markets in the United States and Canada, and 12 stores in Britain, Australia, Japan, Denmark and Korea, went public in October.

Although the shares have jumped, not everyone is convinced.

In the 30 days ended February 15, 2.3 million shares, or 31 percent, of Build-A-Bear's publicly traded stock was sold short, double the amount in December. Rising short positions can be a negative sign for a company, as it shows that a growing number of investors are betting against it.

The company is slated to report fourth-quarter earnings on March 10.

In addition to traditional stores, Build-A-Bear has a mobile store in an 18-wheeler that is driven around the country to public gatherings like state fairs and sporting events.

The workshop is not for bears only. Customers can also build rabbits, frogs and Elmo, the Sesame Street character.

On its Web site, www.buildabear.com, gift items include Lucky O'Teddy Collectibear, Dr. Teddy, Air Service Teddy, Beautician Bear and Baby Bib Bear.

Even so, Clark's ambitions remain relatively modest.

"Our long-term plan is to have 350 stores in the U.S. and Canada and 350 additional stores internationally," Clark said. "For most retail chains that's a drop in the bucket. I don't think that's saturation."

Toys R Us Inc. (NYSE:TOY - news), for example, has more than 1,200 stores worldwide.

"It's amazing they (Build-A-Bear) haven't experienced more successful competition because, on the surface, it looks like a very simple concept," said Sean McGowan, analyst with Harris Nesbitt. "There are people doing similar things but they seem to have found the right formula: service, a great product, and really emphasizing the experience."

NO WAL-MART PROBLEM

The U.S. toy industry has been in a rut. In 2004, sales fell 3 percent after years of weakness. What's more, kids are bypassing traditional toys for items like electronics, clothing and video games.

Retailer Toys R Us has struggled to compete with No. 1 toy seller Wal-Mart Stores Inc.'s (NYSE:WMT - news) discounts and has tried to offer better service and selection to lure shoppers.

In fact, as most companies scramble to find a solution to the "Wal-Mart problem," Clark says the focus of Build-A-Bear puts it in a different league.

"We are so opposite from that. We're not about price," Clark, a retail veteran, said. "That is what a discount store is about -- stuffed animals at low prices."

She spent 25 years with May Department Stores and in 1995 was named one of the "30 Most Powerful People in Discount Store Retailing."

To be sure, while Build-A-Bear isn't a discounter, some animals can cost as little as $10, with accessories sold separately. In contrast, customized bears from Vermont Teddy Bear Co. (Nasdaq:BEAR - news) start around $50.

BUILDING A BRAND

The company is expanding its brand through selected licensing -- Build-A-Bear scrapbooks, books, bedding, room decorations, greeting cards, calendars and shoes. There are also miniature bear-building kits by Hasbro Inc. (NYSE:HAS - news) sold exclusively at Target Corp. (NYSE:TGT - news)

"Licensing is a small part of our business, but it's part of enhancing our brand," Clark said. "We're building our business one store at a time and adding partners one at a time. We're not in a hurry. We don't have a movie coming out this fall and need to have certain merchandise on shelves."

In addition, Too Inc. (NYSE:TOO - news), a specialty retailer for young girls, is creating fashions for the bears, and Skechers USA Inc. (NYSE:SKX - news) will be making shoes.

"Build-A-Bear is a new type of toy store where there's interactivity. Kids love differentiation. They like to have something that's their own," said Jim Silver, publisher of toy industry trade magazines. "There's always a risk of saturation, but they still have plenty of room to grow."