Baby Bunting Group: Growth spurt

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
14 February 2022, 9:00 AM
Sectors Covered:
Gaming and Retail

  • Comparable store sales growth was an impressive +6.8% in 1H22, or +21.8% on a two-year stack. We think there are very few retailers in Australia that will report that level of LFL sales growth in 1H22 over the course of reporting season.
  • Gross margins were 192bp higher than the same period last year. Although some of this step-up relates to favourable hedging and freight contracts, we believe an element relates to mix and distribution efficiency and will be sustained into 2H22.
  • We increase our NPAT estimate by 3% to $30.1m for the current year.
  • We reiterate our ADD rating with a target price of (login to view).

Event

Baby Bunting Group (ASX:BBN) delivered a strong 1H22 result built on +6.8% comparable store sales growth and 190bp gross margin expansion. We had anticipated good gross margin expansion, but the result is stronger than forecast.

EBITDA was $21.8m (pre-AASB 16) and $36.8m (post-AASB 16), 5% above our $35.0m estimate and 8% above consensus on a post-AASB 16 basis. The gross margin was up 190 bp to 39.3%, 80 bp above MorgansF of 38.5%. EBIT post-AASB 16 was $21.3m, 7% above MorgansF $19.8m, despite a 90bp opex impact from the investment in the new national distribution centre (NDC) and into New Zealand.

The interim dividend was 6.6c fully franked, up 14% YoY. Operating cash flow was an inflow of $11.3m, compared to an outflow of $(8.4)m in 1H21.

Analysis

Sales growth

Comparable store sales growth was +6.8% in 1H22. This was better than our forecast of +2.3% and has continued to be positive in the first six weeks of 2H22 (+3.6%). On a two-year basis, comparable store sales growth was +21.8% in 1H22 and +22.0% in the first six weeks of 2H22.

BBN’s out performance is based on tangible market share gains. We forecast a similar rate of comparable store sales growth in 2H22 (+7.2%), to 1H22, although we note the comps get easier as the year goes on.

Margins

The 192bp increase in the gross margin was above expectations. An element of this reflects the 3PL savings created by the opening of the new NDC, which is a permanent change, while further growth in the proportion of sales accounted for by private label and exclusive products (to 44.5%) has also been positive for margins.

We expect 2H22 gross margins to reduce half-on-half as hedging and freight contracts reset (and for seasonal reasons) but still to be around 100bp higher YoY than 2H21.

The ratio of operating expenses to sales rose 125bps (pre-AASB 16), which reflects the running costs of the NDC, as well as one-off COVID expenses ($0.5m) and New Zealand establishment costs ($0.6m). Had it not been for the one-off COVID and NZ costs, the rise in opex to sales would have been around 85bp.

Longer-term prospects

Tantalisingly, BBN indicated it is assessing the potential for growth in broader baby products categories in which it has historically not been heavily active. This may mean greater space devoted to nappies and babywear. This could see further elevated comparable store sales growth in future years.

Although consumables are likely to attract lower gross margins than hardlines, better sales density could result in enhanced store economics.

Forecast and valuation update

We have increased our NPAT forecasts by 2.8% to $30.1m in FY22F and by 1.4% to $36.3m in FY23F.

A reduction in peer company multiples takes our target price down 3.2% from (login to view), offsetting the positive effect on our DCF valuation of higher forecast cash flows.

Investment view

BBN is the only specialist national baby products retailer. It has less than 10% of $5.1bn baby goods market. We believe there is a significant opportunity to take a greater share of this market as it leverages its strong brand equity.

Risks

Loss of market share to lower-cost online competition.

Failure to take market share from discount department stores.

Find out more

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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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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