Chit Chat Stocks - Is Build-A-Bear Workshop Stuffed With Value? With Strat Becker (Ticker: BBW)

Episode Date: September 22, 2022

Build-A-Bear is well known for its retail shops where customers can create their own plush toy animals. The company operates through three segments: Direct-to-Consumer, Commercial, and International Franchising. Listen as Brett and Ryan ask Strat questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here and get a 14-day free trial:  https://streamrg.co/CCM ***************************** This episode is sponsored by Stratosphere. Get started for free at stratosphere.io to get access to powerful data visualizations, specific company KPIs, and much more. ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Strat's work? Subscribe to his free newsletter: https://dueyourdiligence.substack.com/?utm_source=substack&utm_medium=web&utm_campaign=substack_profile&utm_source=%2Fprofile%2F65757048-strat-becker&utm_medium=reader2 Contact us: [e-mail] Timestamps Build-A-Bear  | (4:41) eCommerce | (13:38) Investors | (24:49) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Chit Chat Money. This is our Thursday deep dive interview where we have on an analyst to discuss a single stock in depth. And today we're talking with Strat Becker about Build-A-Bear, probably a company that a lot of people are familiar with, probably a stock that they are not. Highlights from the interview. What do you have? Oh, I mean, the first highlight is just the discussion on the valuation of why it's so cheap. That just popped out to me. I mean, five times earnings when that you have to investigate why something's trading at five times earnings, especially something that's been around for as long as Build-A-Bear has. we go through that, why that is the case. I love to talk about the activist investors and how they

push for things that the management team has slowly started to implement. And it's really helped returning capital to shareholders and stuff like that. And also why Build-A-Bear might be a bit more durable and have a competitive advantage than people might think. I mean, overall, really great pitch. Strat is another. We've had a string of college or young analysts coming on the show and always very impressive um so yeah another you know another great young analyst to to join the show hopefully we'll have him on again yeah we have had kind of a string here of really high quality uh college age investors um and i think you'll see it with strat here as well so we don't need to go any longer without further ado here's the interview

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Okay, welcome in. Today, we are joined by Strat Becker. We came across Strat really through a recommendation from a recurring guest, Connor Mack, who said we need to get

either Strat or Paul, who has been on the show before, to talk Build-A-Bear. And you've done a lot of work on Build-A-Bear. You've actually done some sub-stack work. So I'm going to give chance to give a little sales pitch here for any of the listeners that want to read more of your work. What does the Substack entail? Yeah. So I make a Substack called Do Your Diligence, play on words, obviously. And there's a few things on there. I have some company deep dives that I've done in the past. So at least on Build-A-Bear, I have a really long thesis laid out from January. I have some things that I went independently into some of the growth initiatives they're taking to model out what they look like for the business. And just a couple of things

where I've updated my priors as new information has come in to really reflect and see, you know, what was I right about? What was I wrong about? Why? And I have similar things on quite a few companies. And right now, at least I'm shifting into making these one page stock pitches where it's just, you know, one page, about 300 words laying out everything that you need to know about a potential investment idea. And I'll be trying to throw in some short audio snippets to give you know two to five minute explanation of that as well so if that sounds interesting i'd highly encourage you to check it out and is it free it is absolutely free and that's not going to change all right then there's no excuse not to sign up we'll have the link in the show notes so everyone

go check that out now we uh when we start when we ask and we figure out what company we're going to do brett and i start researching the company we try to find some questions and sometimes we can instantly tell whether or not we're like super intrigued by the company i gotta say with build the bear um it's it's a brand a lot of people know and i think we were both came away pretty intrigued so i'm excited for this one how did you find build a bear not the company but the stock in the first place um and then maybe i don't know if it's like a super known international concept but for anyone that doesn't know what build a bear is could you maybe like briefly describe the concept yeah so i'll go with the concept first so it's basically just a store where you go in you get

to just make your own stuffed animal so you just pick out you know do you want like a bear or dinosaur you know they do pokemon and other licensed characters whichever like shell of a stuffed animal you want and then you'll get to just you know the company will say how you get to bring it to life through uh you know putting sound effects in it you know beating hearts you get to put the stuffing in it yourself throw on clothes whatever name it whatnot uh to really make it feel like an experience and that it's your own um and i think like most people at least the united states you know i knew them from when i was a kid i got one back then uh almost 15 years ago probably something like that um but i only found out it was a stock after i saw a press

release pop up uh on my feed uh about 18 months ago after they had some pretty strong results and i was like you can own this because i had no idea um that a company that that is generally so well known in the States would not only be public, but be, I guess, that small in the market cap range that it was at, which it still is at today, around $200 million. All right. Do you want to talk about how the company's changed over the years? I'm sure a lot of, I don't think most of our listeners are the target demographic, so they probably had an experience with it a long time ago.

So how has it kind of evolved over the last two decades? And then you've written about their physical footprint changing as well. Could you talk about that? Yeah. So I think the biggest change in how the company works is if you're talking from before 2008 and especially before 2015, it was basically just an in-store, in-mall experience targeted towards kids. So that's why most people know that the business would be involved with it as a kid.

Maybe they got a gift or two and then not really care about it as an adult. The change has been really trying to engage older customers, expand the age demographic that's applicable, and to change the use case away from just, you know, in-store experience to also gifting impulse purchases and so on to make it just more applicable to older people, but give more cases to generate sales. And that's one of the reasons that the fiscal footprint has changed as well. uh so in 2015 92 of the locations were these traditional formats that most people are probably familiar with uh where you know it's a couple thousand square feet um and you have all the stations and bells and whistles uh in a mall today that's just 55 and if you include uh these little concourses which are you know 200 square feet you know much lower fixed costs that they put um not in a dedicated store spot in the mall but like in the hall they're about 65 in malls today

the end of q2 um and they haven't actually left many malls fully the change is that they've been able to start growing their footprint out a lot in tourist locations where they've more than tripled their store count the last few years uh and also third party where they went from four locations uh in 2015 up to 65 today um so it's really growing where there's opportunity and better store foot traffic and you know downsizing or closing out of certain areas in malls that that aren't attractive for them do you know how many can you give a reference to how many stores they have just for reference of the size of the business yeah so they have at the end of q2 uh in north america about 378 locations so um 209 of those would be their traditional in mall style

and they have about another 39 or so that are those concourses and then the rest of them are um either tourist locations they have you know a couple seasonal spots um 22 of their stores are actually like store in stores inside of walmart's so um you'll have that and then uh there's third party stuff which uh kind of varies in location because some of them are on cruise ships some of them are on resorts um you know in the caribbean and they just count under the north america branch but that's the general north american footprint i think i believe you may have been the first person i've seen call it this but the mallpocalypse is sort of what they've been having to evolve away from and it sounds like they've done a pretty good job with that um you want to you want to

talk on the uh yeah so you know we know the core retail operation is fairly easy to understand but reading your write-up the one with paul which again we'll link in the show notes if anyone wants to read that um what other segments because they're doing quite a few different things that they're exploring for the next kind of few years what do you think has the most promise uh to kind of be meaningful for build-a-bear yeah so i think there's a few uh the first one that i got to see in person back when it was a prototype in december is um this automatic teddy machine thing it's basically a vending machine um you know where you have like a touchscreen and you can pick out um you know what bear you want what accessories you want

and just have it drop through and that's one of the things where they're targeting you know a different use case so this is um often going to be in airports or children's hospitals so you're going to see someone or you traveled somewhere and you need to get gifts with someone on the last second you'll just see this and pick something up really quick um and that has the potential to be an over 20 million dollar annual revenue driver and add over five million dollars of uh within the next five years and that's assuming they can only put um you know one machine per airport right now so follow up there does that does it have all of the similar mechanics to like the in-store uh if you're able to like bring it to life kind of thing or is there kind of like

already stuffed and made does it does it does it erode the customer experience at all yeah that's the important thing because it's a different use case it doesn't erode the value proposition for the in-store so either these vending machines come pre-stuffed you know there's no labor in them it's you know obviously much smaller square footage so the cost is way less um but because it's targeting the impulse buyer it doesn't sacrifice the people that would be looking for an experience with the brand, because if that's what you want, you can still just go to the store and get that yourself. Yeah. Honestly, just discussing out loud, it seems like the perfect way to acquire new customers, especially a parent. So I don't know, I'm just thinking a dad on a

business trip or mom on a business trip wants to get a gift for their kid. They're coming home like two weeks later and they're like, oh, okay, this one looks perfect. The kid gets it. And then they're a Build-A-Bear customer for life. Speaking though, I have one other follow-up the retail operations are they in any international areas um or is it mainly just a north american business yeah so about 88 percent of their total retail sales are from north america so that's virtually all the united states and then a very tiny snippet of canada and then back in the early 2000s they bought out their only um direct competitor which was located in the uk so they have right now in the uk and ireland 39 locations um and outside of those company operated spots

they have 64 spots in uh the middle east asia um oceania and south america that are uh franchised um so there's check collectors in that instance gotcha i would think yeah i would think this would work in east asia um but maybe they haven't had too much success there we uh we interrupted them briefly is there any other yeah is there any other before we get to the next question or is there any other segments you find promising? Yeah. So outside of the ATMs, they also just announced a couple of new things in their recent earnings report that were being pushed for for a while by some activists that are coming to fruition that are exciting. So they're going into pet stores with an outbound licensing deal. So

Capital Light, they're not really putting capital into it. They're going to get royalties off of it in 1600 pet spot locations starting later in october um and after a certain time period that's going to be no longer exclusive to just in pet smart stores they'll be able to expand that out to uh all you know online and physical pet retailers that they want to and can get deals for um because the terms aren't you know fully public yet you know it's hard to ascertain uh exactly how much of a driver that will be for the company but it's certainly attractive and has long-term potential. And they're also launching a pajama product line. You know, the logic is that if people are going to have their bears with them when they go to sleep, you know, why not try to

expand a bit more into the things that people are using at night. And they're trying to use that particularly as a holiday sales driver, you know, especially since families like to get, you know, matching pajamas for the season. This episode is brought to you by stratosphere.io, the best web-based research terminal for company-specific metrics like KPIs and segment revenues. The service saves time, has a beautiful interface, and has the best data visualizations on the internet for equities. Now, our favorite features are the 10 years of data with data visualizations. This includes company-specific KPIs, charts for all the financial metrics you might be interested in, and stuff specifically for that company. So for example, if you're looking at a payments

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roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Makes sense. All right. Have they had any success in e-commerce? I mean, what percentage, if they have explored this, is it as of the overall revenue and have they really executed with that build a bear model in an online format? Because I would think if you could gamify it a bit, kind of make it sort of an interactive experience, it could be quite fun for kids to do. Yeah. I think it's important to say off the bat too, this is another situation where the target customer is different so uh the priority target for in-store sales is kids but the priority target for online sales is adults that um either want to get gifts or be collectors

um you know everyone knows their funko pops um you know all the licensed products that people kind of just get latched on to they're replicating that um so right now it's about 18 percent of the retail sales which is you know over 15 percent of total sales comes from their online channel And that's from under 4% in 2015 and under 9% in 2019. So being able to pull this forward a good amount. And they do have some of those gamified items. They have like a 3D builder. But if I'm going to be honest, the online experience across the board for the company

is not really caught up yet with where you should argue it's at. They are making investments and rolling out updates on that right now through the third quarter. So, you know, it's looking like things are going to improve on quality there and let this be a bit better of a sales driver going forward. All right. Let's talk maybe some of the financials just to kind of give listeners some context. You already mentioned how many stores they have.

How much do they generate in revenue? What kind of margins do they currently have? And do you think this is a business? What do you think growth looks like on both the top and bottom line? Yeah. So just on a last four quarters basis, their sales are $443.5 million about. Their gross margins are pretty high, too, at 52%. And that's despite some slippage from them advancing inventory orders and higher freight costs, both of which are going to be reversing going forward.

So they have wiggle room for incremental improvement. Their operating margin also is over 12% right now, which despite those pressures, you know, freight was a 400 base point loss in Q2, still near the historical highs of the range. I think the big difference is that, you know, there's embedded higher margins from operational efficiencies the company's gained. You know, all their 70% of their online sales are fulfilled in their physical store locations rather than a warehouse. so that's been a driver given the operating leverage because just increased volume in stores is creating a better profit profile for the revenue the company generates and it's also lower incremental shipping costs than shipping out of their warehouses um and you know one of the things i did in my research for the company was i sold you know i went to about a dozen of them myself

but what i did is i went one day in like december and just made one completely on my own just to see see what the selling process was like and there's a lot of upselling within uh the business line um you know before you make the bear you can put a sound effect in it or beating heart you can throw in a scent you know accessories um you know check out you get to potentially spend a couple extra dollars on a box um it's reliant on well-trained staff and based on the stuff i've seen they don't really have too high churn in their part-time worker force which is good um but it's allowing them to a lot unlock a lot of incremental profit so um i think compared to the past and this kind of goes into a bit of the valuation side um the profit margins they're

getting are more durable than before and that um you know unlock some upside opportunity in the future are they growing it kind of i mean obviously there's been that a bit of a mall apocalypse headwind um are they kind of growing despite that yeah so through the first half of the year their sales are up over double digits from the prior year um q1 saw some benefits from uh the uk and ireland side reopening uh fully um so their sales growth for that quarter was about 28, 29%, but domestically was about 20%. And Q2 domestic saw growth of around 10%, despite it being completely lapped from stimulus, with the additional inflationary pressures layered on. So Europe's a bit weaker. US is still growing strong. That's obviously about

just shy of 90% of the retail sales. And there's a path for growth there going forward, too. through both in-person, you know, they've been pretty lucky without having the strongest digital marketing strategy to have a good amount of their product lines just become TikTok trends and kind of go off on social media and have things like the Build-A-Bear date come through online that has really encouraged a lot of teenagers and young adults to come into the store. And those aren't things that will likely give up. So there's a pretty good domestic runway for, you know just the original business to grow without considering uh all the other incremental stuff that they're layering on right and it seems like it's really important for you know it's pretty

easy at those people that are both the kids below 10 to love you know a stuffed bear product but getting them to still be associated with the brand and then when they have kids later you know it's kind of uh i think of it similarly to the nintendo experience with you know parents playing mario kart with their kids but let's talk about valuation the biggest thing that popped out to me was how cheap the stock was. Why? And correct me if I'm wrong, what is causing investors to give an earnings multiple below five? Because that really stood out to me when looking at this. Yeah. So they did have a one-time tax benefit in Q4. So if you take that out, they're under six right now still, but from my estimates, at least-

Expensive. That's expensive. Yeah. Yeah. But if you're going a full year, they'll probably still be under five. So really cheap. And I think the main reason is that this was a stock that was, you know, the kind of small cap hedge fund group got pretty popular in 2014, 2015. You know, the new management team had just taken over and things were starting to turn around. And then the impact of Amazon on mall traffic really hit in 2015. And Build-A-Bear was obviously very concentrated in malls at the time. And the stock turned out to be a pretty classic value trap alongside basically all other mall-based retailers. Um, that's pretty stuck in the pricing narrative, especially since there's zero, um, you know,

public analyst coverage of the company. That's not sponsored by BuildGround themselves. The one sell side analyst that covers them is paid, you know, 40K a year by the company just so they can have something out there. Um, but since 2018, no companies, you know, independently covered them. And that prevents a lot of information about the actual changes that have happened to the fundamentals of the company from being more properly reflected in the price. The other point to that is also the potential that people believe that the margin gains

they've had, or the sales growth, they're about 50% over 2019 levels, are not sustainable and going to mean revert. And if that scenario were to pan out, obviously, the stock is not as cheap on a forward basis that it looks to be on a last 12 months basis. So what's sort of their capital allocation strategy? Are they returning cash to shareholders? Yeah. So I think one of the unique factors of this company is they have zero debt and have not for any point in the last 10 years. And they don't really look like they're planning to take on debt. So all of their excess cash that they generate has the opportunity to go back to shareholders because their growth avenues and their maintenance capex are not expensive.

altogether they're you know at max three and a half percent of sales three and a quarter percent of sales um so in the past 12 months so far they they did you know dollar 25 a share about a 20 million dollar special dividend in december uh and at the same time they also announced a 25 million buyback authorization that was completed that original buyback on august 9th and they took out around 10% of the outstanding shares, a little less than that. And they already announced a new $50 million buyback. From the current price, it could take out just under 25% of the shares outstanding. And they have about $14.5 million in cash right now. And based on the inventory flow changes throughout the year, as we get to the end of the fiscal year, they should see an inflow of

about another 16 million of cash based on the buyback pace they were doing in the first half of the year of the fiscal year. You know, they're on pace to be able to pull out that whole authorization within 18 months and basically return over 25% back to shareholders in a pretty quick clip. Would it make sense for them to add some debt here? It just feels like they could lever up and buy back uh and activists were pressuring for that um i just don't it could theoretically make sense especially because they're not levered basically like any of their other comps although you know in this case you could argue that means they deserve a premium to their equity valuation just because of that um you know i think um it's not really in line with

historical practices for the business and they don't want to necessarily take added risk um especially if every other mall-based company is starting to see headwinds pile onto them the way that they've been able to avoid. And they just, to be frank, don't need that capital to drive growth. So they don't want to necessarily lever up to just take out shares when they have the cash flow to buy back a lot without needing to do that. If you're listening to this ad right now, we know you're already a listener to our show. But for our avid listeners, we've also started a paid membership service called Chitchat Money Plus that extends beyond just our podcast. Every Tuesday, subscribers get access to one not-so-deep-dive research episode that covers

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Fund, along with shows on our broader investment strategy. Sign up and become a Chit Chat Money Plus subscriber today. We can't wait for you to join our community. All right. So you mentioned the activist investors briefly there. who it sounds like they've maybe had activists different activist investors throughout the years who are vying for changes right now and then kind of what changes are they advocating for just that lever up there's been more than just that uh so one of them was david keenan uh keenan wealth management and he has a long story with the company he was an activist you know uh well before uh covet or anything like that he actually got a board seat in 2019 um left the board seat

in 2020 went back to being an activist um so last fall he published an open letter that was saying you know they should go into to pet products which now they are um they should go into nfts which now they are and he admits it isn't really you know sales drivers so much as you know ability to generate extra marketing um they should start buying back stock which they've done substantially um and because of the execution on not just the existing business but you know uh him being able to push management and the board to be open to you know opening new business lines and becoming much more friendly to shareholders and capital return um you know he used to say that the ceo was you know not a winner um but he upped his stake in the company by 25 last week

and now it's over 8% of the business. So his tune has clearly changed by a large amount. The other one is Carlo Canel, who's a pretty well-known activist investor in the small cap space. And he's also been involved with the company for many, many years. In July, he had a private conversation with the company where he told them to do a sale leaseback of their company-owned distribution center, get over $30 million from that, draw down their credit revolver of $25 million, take some of the cash balance, and do a tender offer to take out in between 40% and 66% of the company's shares, depending on the leverage ratio they were to take on. He says that the buyback alteration is directionally a positive move,

but it's not what he wants. So he put out something else in early September after the uh quarterly release telling them to just do what he said or have all the board resign basically um and he owns about 11 of the company right now so together the two of them have a lot of the business on their hands um and you know i think they just both really don't like that the business was being valued as low as it is um but uh canal is the one that's clearly more dissatisfied out of the two at the moment you know keenan sees this is a buying opportunity It's the first time he's bought shares in about two years. What do you think of the management team?

Yeah. So in terms of execution, they've been doing great. You know, they were doing a good job initially when most of them came on in 2013. And they had a good initial turnaround. And they were just caught off guard, like most people that operated mall-based stores with the declining mall foot traffic in the mid-2010s. Um, they were making quietly a lot of moves to try to diversify the business. And, you know, by 2018, you know, they were down from that 92% mark of, you know, traditional

mall stores to 75%. So they were making the shifts and it just wasn't necessarily coming through into the results yet. Um, and COVID kind of accelerated a lot what they were doing and with the success of the business gave them more optionality to, uh, pursue the growth avenues to drive longer term success um and they've also done a good job of navigating the current supply chain issues for the most part um a lot better than their peers um the one downside this kind of goes into um you know whether or not you know it'd be you know takeout target is um the board itself doesn't

really own much equity in the company and despite the ceo and cfo having you know substantial equity stakes in the business. Their comp packages are pretty cushy. So it's not necessarily aligned in their best interest to sell out the company rather than do what they can to maximize value for it as a public business. Gotcha. Now, speaking of the take private bid, you guys discussed that in that write-up. What is the opportunity there? What sort of premium do you think would be reasonable here? Because I look at the earnings multiple and I think KKR, one of those companies, could really take this out at a decent price. And also, you know, you can see a 50%, even 100% premium for current shareholders. Yeah, I think the important thing to note there is that if it were to ever be

taken out, you'd need to have a large premium on it, because the especially the activist shareholders, but most of the shareholder base would not be satisfied with this thing being bought out at, you know, let's say, 20-30% premium to today's price. They'd want it to be a valuation that was at a minimum five to six times EBITDA, which would bring the stock to at least 25, 30 a share. In that case, the model that Paul put together still shows being pretty attractive doing a levered buyout. You'd be able to get a nice swing on the equity if you started with about $112 million. If you're buying the EV out at around $400 million and take it up to potentially five, 600 million within five to six years, assuming proper execution. I think it just

goes to the point, like I said, though, in terms of it not necessarily being aligned with management, but from a private side, it's the potential to get a lot of returns if they can convince them to do it at the right price. Okay. We have one more question here, and I think we have to hit on this because we really haven't talked much of the risk yet. what could go wrong with an investment in Build-A-Bear? What are you watching as any sort of indicators that your thesis might be wrong? Yeah. So yeah, I think the number one thing is how their store mix continues to evolve over time, because even though they're much more diversified from malls than they were before,

they need to keep doing that. They can't get complacent and stop just because about 99% of the stores are profitable right now. If they just stay where they are, You know, things would probably eventually change, especially malls is what traffic trends keep on. And that put them in a bad spot. So that also means that the new store concept they're trying out, like Build-A-Bear Adventure, which is, you know, a large, it's a pretty large off mall premise idea where they have, you know, arcades, their own kind of more regional distribution centers, and other bells and whistles inside of that business, you know, to really emphasize more parties and activities there. if that doesn't pan out or turn out to be a good investment, that might make it more difficult for the business to keep its physical footprint rotation going because they can't start to pan these out in certain areas to leave malls. So that's one risk. Another risk as well is that the online stuff in the past couple of years kind of mean reverts back to trend that the improvements they're investing in right now that they're going to be rolling out throughout this

quarter don't do enough and people start leaving the online experience. They also lose operating leverage in that scenario. So that hits margins on their stores and would make any lack of movement away from malls even worse. The inability to really have their own IP develop out as sellable also matters. About 30% to 50% of their sales in a year, depending on what movie release schedules look like tend to be licensed products um and while it's a big revenue and profit drive for the company because there's kind of premium price points to sell it also means that they're more reliant on timely releases of you know content from third parties and you know this isn't just a movie industry thing this goes to a lot of industries but delays have been pretty pervasive

uh not just in covid but increasingly beforehand um so they have their own product pipeline that's pretty robust at the moment and generating a lot of its own hype. The Pink Frog or Oxolotl have been a couple of their items that have done really well. But if they can't actually keep developing new items at the same success rate as they have before, that can be a risk for the business. And the other main one is that these new initiatives they're trying to do don't actually pan out. If they do, it's great because they all require pretty minimal capital investment from the company so they're very high rois um but let's say that these vending machines they're doing you know can't be replicated out of airports or or major international airports and it can't grow

uh as much as people hoped it could or um their online gift box think they're trying that launched in january uh just doesn't gain traction or you know they're investing in inventory for these pajama products and they just don't sell through or the pet products they're doing uh through outbound licensing gets canceled after a year. Those all would take away several points of the investment thesis and have to make you reevaluate the investment. All right. One more follow-up here. Have they discussed any partnerships with virtual goods companies or gaming companies? Because I was thinking, I mean, a partnership with Roblox seems absolutely ideal for a company like this. And it would mitigate any threat from younger

kids spending more time on mobile games virtual goods and that's where their dollars are going yeah so it's it's funny you say that because you know one of the other announcements in their you know quarterly call outside of uh the pet stuff in the pajama products uh was that they're actually partnering with a video game company to come out with a game um or to be you know have product placement within games going forward so they're looking to be much more involved virtually outside of just this nft project that they're working on yeah no no it's like the you know some of the investors said all it would really serve as for nfts at least be marketing but um you know the video game stuff is a much you know more sustainable attention grabber for

a going forward basis so if they're involved in video games or have developments um that are pushed out that are either taken up on platforms like roblox or just kid-friendly games that you know parents can throw in front of their you know you know three to five year olds on their ipads um that will be a very positive momentum contributor for the business and staying in front of uh family's minds um but that's going to take time to actually develop and come to fruition this whole you know pet item for example took about a year from discussions to being announced uh within the company so them announcing that they're working on today still means there's probably you know a ways to go before it's a public facing item do they have any like so obviously a lot

of their sales i think you said it was 30 to 50 percent comes from licensed content is that concentrated in like just a few companies like is it just straight like disney and i don't know do they have nintendo products pokemon yeah pokemon or is it kind of more diverse is there any concentration risk in terms of in terms of licensed content yeah so their biggest licensed drivers are pokemon animal crossing um harry potter and then uh other disney product lines like the mandalorian because apparently everyone likes baby yoda for some reason um so there's some concentration risk within key ips that would be larger sales drivers um but their license ip collection is pretty broad within those categories it's not like

they're just selling um you know one or two pokemon you know they have new product rollouts with those pretty regularly what they've been doing for example is pokemon is um all the evolutions of like the eevee pokemon because apparently it goes into like you know 20 50 different things uh i've talked with people yeah yeah yeah it's exactly yeah so they've been rolling those out incrementally over time to kind of you know have a new excuse for people to come back or buy something online or come in store um and they are working pretty hard to actually expand their existing product relationships with companies like disney they just got disney princesses introduced uh over the summer so they're kind of expanding the variety with their

major partners of you know important ips that they can have um but um despite those concentrations uh The fact that movies still come out pretty regularly, either streaming only like Turning Red, which is a good drive for the company, or stuff that can be in theater like Sonic the Hedgehog, gives some freshness to their product mix on licensed IP that kind of dilutes the concentration. And just the fact that a good amount of their licensed IP stuff is also just accessories. so you know they have a partnership with the nfl and the mlb for every team or in the nba for every team for clothes to put on you know your own bear so that goes to sports they do that for college sports as well you know i never got stuck on to college stuff maybe because i go to a d2 school for sports for the most part um but uh i'd say the risk there is more related to you know extended delays on new releases of movies or streamable items rather than um just being stuck in a couple

key ips what's uh what's their exposure to japan because i hear you mentioned pokemon and animal crossing and i'm thinking why don't they have 50 stores across the that country yeah so they actually don't have stores in japan right now they used to um they had you know a franchisee that had i think at one point about a little over 10 years ago about a dozen stores and malls there um but japan's shift to online sales generation away from malls has been kind of similar to the u.s so you know unlike the middle east where malls are and like the uae for example where malls are really really good for sales generation um that was not happening in japan and that business uh for that franchisee wound down you know i think considering a lot of their licensed

ips like pokemon and they could probably move into region-specific license ip in japan in particular for certain product lines i'm sure people get their dragon ball stuff or whatnot um or one piece or naruto and whatnot um you know i think there's an opportunity to find the right partner but they probably wouldn't want to re-enter japan uh under company-owned operations they might want to either wholesale or find a franchisee that has a better strategy for locations gotcha and splatoon i mean there's tons of yeah splatoon 3 just came out i saw they have like the ice cream for that and everything it's it's you know countrywide phenomena there yeah exactly well you have any more questions i'm good i think that's all the questions we have um for listeners

that enjoyed this i want to keep up with you what's the best place for them to do that yeah so the easiest way to just dm me is twitter my handle there is just strat becker it's literally just my full name because I was named after a Fender guitar, which means I can't be creative about anything else. So that's the easiest way just to DM me. You know, if you're subscribed to the newsletter and you just leave a comment on it at any point, or, you know, it's in your inbox, you send an email back, I see all those as well. So those are a couple of easy ways to get in touch with me. If you want to talk more about this or any of the other things I've worked on before. Perfect. Well, that is going to do it. Brett and I want to remind the listeners that

we are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thanks again, Strat, for coming on the show. We will see you guys next time. don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way I planned. And today, I'm still figuring it out.

Somehow, things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.