Baby Bunting Group: NZ adds longevity to the growth profile

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Former Senior Analyst
Date posted:
14 February 2021, 7:30 AM
Sectors Covered:
Consumer Discretionary (Retail)

  • Baby Bunting Group (ASX:BBN) reported 40% NPAT growth in 1H21, 6% short of our forecasts due to less GM expansion in the 2Q and continued investment in people/infrastructure.
  • Key positives – 1) confirmed entry into the A$450m NZ market from FY22; 2) LFLs +18.5% in first 6 weeks of 2H21; and 3) strong pipeline of stores in FY22.
  • Key negatives – 1) limited opex leverage despite strong top-line growth (BBN continues to invest in people/IT + COVID costs); and 2) GM contained in the 2Q (although appears transitory); 3) op. cash outflow (largely working capital timing).
  • The move into NZ provides further longevity to an already strong growth profile (20% 3-yr EPS CAGR). While BBN’s valuation is at a premium to retail peers (but in line with the market), its growth profile is far superior and we are mindful that BBN could enjoy a solid birth-rate back-drop over the next year or so. Add rating.

1H21 result = total sales +17%; EBITDA +29%; and NPAT +42%

1H21 highlights (pre AASB16): revenue +16.6% (SSS +15%; 3 new stores); gross profit +18% (GM +40bp); EBITDA +29% (CODB % of sales -44bp); and pro-forma NPAT +43%.

Online sales (incl. Click & Collect) grew by 100%, comprising 19.7% of total sales, while private label/exclusive sales comprised 39% of total (vs 36.5% in FY20).

BBN’s gross margin strength slowed markedly in the 2Q due to higher freight/3PL costs, sales mix and VIC lockdowns (DC located in Melbourne – higher haulage costs with growth in other states).

Opex was also impacted by temporary COVID-19 related costs (A$1m; expected to moderate by 80% in the 2H) and further investment in bench strength (senior roles) and IT/systems – limiting more meaningful opex leverage on a strong sales outcome.

Strong start to 2H21; NZ to launch in FY22

BBN’s LFL sales growth in the first 6 weeks of 1H21 was +18.5%, a very strong start to the year. After a period of due diligence, BBN has confirmed it will enter the NZ market (via an omni-channel model) in FY22 (4 stores expected).

BBN’s current network plan for this A$450m market is “10+” stores and is expected to be modestly dilutive (-A$1m) to profit in FY22 before becoming profitable in FY23.

We assume BBN rolls out 4 stores pa, reaching 14 stores in FY25 (A$63m rev/A$7.5m EBITDA; ultimately maturing to A$87m rev/A$13m EBITDA – assuming revenue/store EBITDA margin discounts vs Aust.).

Mapping out our forecasts

Our FY21/FY22 forecasts are unchanged while our FY23 forecast lifts by 8% and more meaningfully beyond (NZ rollout inclusion). We forecast FY21 EBIT of A$36m (+27%), implying A$20.2m in the 2H (+21%).

Key assumptions underlying this 2H forecast includes:

  1. c7% SSS growth (material slow-down vs recent 18.5% run-rate, but the group will cycle a strong May/June – c20% based on our back-solve)
  2. 1 new store
  3. GM +26bp
  4. CODB -44bp (% of sales).

Our 2H21 forecast represents 57% of our FY21 forecasts (vs 60% skew in recent years).

A lot still to like: upgrade back to Add & Revised PT

Our DCF/PE valuation increases (login to view) with long-dated upgrades (NZ rollout) benefiting our DCF and a higher PE multiple.

We think there are various factors which could support a positive demand environment for BBN in the coming year or two (and recent Medicare data supports this view):

  1. COVID-19 has been very well contained in Australia
  2. More flexibile working conditions
  3. Relatively resilient economic conditions/low unemployment/strong equity and housing markets.

Upgrade to Add; increased PT (login to view new target price).

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