Baby Bunting Group: A very healthy first trimester

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
07 October 2020, 4:00 PM
Sectors Covered:
Consumer Discretionary (Retail)

  • BBN’s 1Q21 trading update showed continued strength (LFLs +17% or +28.5% excl. metro Melbourne) with regional strength outside of VIC reasonably consistent. No formal FY21 guidance was provided, as expected.
  • GM expanded by 70bp in the 1Q while the company called out elevated operating costs related to COVID-19 (freight, cleaning etc).
  • Outside of VIC, >90% of sales were transacted in-store (including C&C), highlighting the importance of BBN’s store network within the overall offering/model. We upgrade forecasts by c5% and now forecast 25% EBITDA growth in FY21.
  • BBN’s growth profile remains attractive (MorgsE 18% 3-yr EPS CAGR) backed by various drivers. The stock continues to tick most boxes: balance sheet, defensive attributes, store growth potential, GM upside and opex leverage with scale. Add maintained (Login to view target price).

AGM update – strong trading continues even including Melb

At its AGM, BBN provided a strong trading update with LFL sales growth FY21-YTD (to 2 Oct) +17%. Excluding Melbourne metro stores, LFLs are +28.5% (similar to the first 6 weeks trading update provided in August).

We think BBN’s sales strength reflects the following: 1) a shift in share from a more depressed second hand market; 2) price match guarantee strategy; 3) taking share from the DDS (discount department store) channel; and 4) the amount of differentiation BBN offers vs other operators.

Excluding VIC, trading on a State basis has been consistent with a majority of LFL growth driven by transactions as opposed to ASP. BBN noted its GM was +70bp in 1Q21 but also noted it has seen some escalation in COVID-19 related costs (cleaning, PP&E and freight).

90% of sales in 1Q21 executed/picked up in-store

BBN provided channel mix detail for 1Q21. Excluding VIC, 82% of sales were executed in-store, 8% via online delivery and 10% via click & collect. Despite strong online sales growth (+126% in 1Q21), c90% of sales are still being executed in-store (including C&C).

This highlights to us the importance of the BBN store network within the overall offering/model – in stark contrast to some other retailers. Additionally, on the other side of COVID-19, we think there will few retailers offering a real store roll-out growth story.

Margin prize unchanged; NZ provides some optionality

BBN reiterated that is currently undertaking a strategic review of the A$450m NZ market following the recent launch of online shipping to NZ. We expect there may be a small store footprint opportunity over time but have not factored anything in at this stage.

15% share of the NZ market in the LT would equate to a cA$70m sales opportunity (A$6m of EBITDA based on FY20 Australian margins). BBN has previously articulated a LT (pre AASB16) EBITDA margin target of 10% (8.3% in FY20) which can be achieved via multiple avenues: continued GM upside (P/L, direct importing, supply chain benefits); and operating cost leverage.

Importantly, around 28% of product sales go direct to store and BBN targets this to reduce to 10% over time which will release meaningful cost efficiencies.

Add rating

We upgrade our forecasts by c5% and now forecast 25% EBITDA growth in FY21. Our DCF/PE valuation increase (Login to view target price). Today’s result further solidifies our view regarding the strength of BBN’s brand and position as a category killer. BBN offers the highest growth profile in our retail coverage universe. Add rating maintained.

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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