Baby Bunting Group: Born Ready

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Senior Analyst
Date posted:
06 October 2021, 8:30 AM
Sectors Covered:
Gaming and Retail

  • We have upgraded our rating on Baby Bunting Group (ASX:BBN) to ADD rating (from HOLD) following an upbeat assessment of current sales and margin trends at the company’s AGM today. Our forecasts for NPAT increase by 3.6% in FY22 and by 3.8% in FY23.
  • Our target price goes up by 3.3 % to (login to view). Overall LFL sales growth between weeks 7 and 14 of FY22 were positive at +3.2%, and an impressive 10.0% if NSW and ACT are excluded. YTD gross margins were 120 bps higher than the PCP.
  • As the only national specialty retailer of maternity and baby goods, we believe BBN is well placed to take share from non-specialist competitors such as department stores and to build its presence online.
  • The entry into New Zealand represents an extra growth driver and could be a template for further geographic expansion in time.

Recent trading update shows positive sales and margin dynamics

At its AGM, BBN indicated that comp store sales growth (LFLs) strengthened to negative -1.3% for the 14 weeks to 3 October (+4.7% excluding NSW and ACT). LFLs after the first 7 weeks of the year were previously reported as negative -6.4%.

Overall LFLs were positive +3.2% in the period between weeks 7 and 14 (+10.0% excluding NSW and ACT). BBN comes up against tougher comps in Victoria from October, but we regard the trajectory in LFL sales as encouraging.

Online sales remained strong, rising +37.7% yoy despite cycling strong comps of +126%.

The gross profit margin was up 120 bp to 38.7% YTD. This was due to increased penetration of private label and exclusive products, sales mix and efficiencies in the supply chain.

We have increased our NPAT forecasts by 4%

Private label and exclusives were up to 44.3% of sales YTD from 38.0% in the PCP and 41.4% for the whole of FY21. BBN has seen some inflation in the cost of goods sold due to sourcing challenges and higher freight rates, but it reports it has contracted annual shipping rates until the end of the calendar year and has no reliance on air freight.

We think this dynamic, and the favourable FX (as well as investment in the launch of New Zealand) give reason to be a little cautious on margin as the year progresses. Nonetheless, BBN has started the year well and we have increased our FY22 gross margin forecast from 37.8% to 38.0%.

We have also increased our LFL sales forecast slightly from 3.0% to 3.2%. This, combined with our higher gross margin assumptions, take our forecast NPAT up by 3.6% to $29.0m in FY22 and 3.8% to $36.1m in FY23.

Investment view

The change to our earnings estimates also increases our 12-month target price by 3.3% from (login to view). With 14.2% upside from the last close of $5.43, we upgrade to an ADD rating (from HOLD).

BBN is the only national specialty maternity and baby goods retailer in Australia. It has less than 20% of a $2.5bn addressable domestic market. In our opinion, there is a significant opportunity for BBN to continue to take share from non-specialists such as department stores, leveraging its very strong brand equity, as it improves its ecommerce architecture and continues to roll out new stores across Australia.

The opening of stores in New Zealand will finally take place later this year, which opens a second avenue for growth and may provide a template for further geographic expansion in the future.

There are around 300,000 babies born in Australia every year. Maternity and baby goods are less discretionary than many other categories of consumer spending. The latest ultrasound scan data from Medicare indicate an upturn in pregnancies, which of course augurs well for BBN’s future acquisition of new customers.

Risks

An investment in BBN is not without risk. The company is busy on several fronts. Its transformation programme adds additional opex and capex. The guidance for this extra spending didn’t change today, but the investor should monitor progress.

Secondly, the launch of babybunting.co.nz appears to have been a success, but entering any new market brings risk and we will be following the sales data from the new stores in New Zealand very closely later this year.

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Disclaimer: 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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