Can Baby Bunting Overcome A Soft Start?

This story features BABY BUNTING GROUP LIMITED. For more info SHARE ANALYSIS: BBN

Brokers are prepared to look beyond the weakness in the first six weeks of Baby Bunting's trading in FY18, suggesting this is not necessarily the start of a trend.

-Volume growth remains positive despite weak start to sales
-Growth outlook lower as management invests to strengthen position
-Investors seen tiring of store roll-outs to drive growth
 

By Eva Brocklehurst

Baby Bunting ((BBN)) expects to generate sales growth in the mid-single digits for FY18 but had to acknowledge a very weak comparable start to the year. Citi notes guidance for FY18 requires a sharp turn in like-for-like sales from the -4% decline which occurred in first six weeks.

There are number of factors suggesting negative like-for-like sales are temporary but also an equal number that suggests FY18 could be challenging. Factors of a temporary nature include sales in the prior period being boosted by the launch of a popular new pram model, exclusive to Baby Bunting, as well as the clearance of older models.

The timing of school holidays may also have had an impact. On the negative side, a weak consumer environment and tough retail conditions could hamper sales over the rest of the year.

Morgans also suspects an over-stimulated corresponding period may be partly to blame for the comparable weakness in the first six weeks of the first half and flags the fact that volume growth remains positive. The broker notes online sales have now increased to 6.4% versus 4.2% in the prior corresponding period. Still, with increased investment and some risk to the sales growth target the broker prefers a Hold rating.

Macquarie agrees the comparables are tough but questions whether FY18 guidance can be achieved. FY18 operating earnings (EBITDA) are expected in the range of $25.3-27.0m which implies 10-17% growth, with sales growth offset by additional investment. Margins are expected to be flat as a result.

The broker believes, regardless, the near-term earnings outlook is clouded and the challenging retail conditions are likely to weigh on sentiment in the short term. Morgan Stanley believes the weak start to FY18 is not a trend, although the growth outlook is lower as management invests to strengthen its competitive position. This has scared investors, in the broker's opinion.

Amazon

Another question for brokers is how the business will fend off the entry of Amazon. Sales could be affected if Baby Bunting's suppliers sell to Amazon, and the company may need to obtain exclusive rights or styles, to minimise the ability of the consumer to shop around.

On the other hand strict regulations in baby goods may mean Amazon finds it challenging to source products compliant with Australian regulations that are cheaper than Baby Bunting. Citi believes the company will need to invest in its cost base to ensure it can defend its territory.

The company has made progress in online capabilities but still does not offer free delivery and does not have a mobile app. Furthermore, delivery time for metro is 2-5 days, which may need to be improved if Amazon launches its Prime offering.

The company will open 5-8 stores in FY18 and is expected to reach its target of 80 stores in FY24. This should mean six years of growth in rolling out stores but, as Citi points out, 4-5% of the future roll-out is regional stores, which trade at a 40-60% discount to metro.

Macquarie suggests some “investor fatigue” is occurring regarding the use of store roll-outs to underpin earnings growth. This is demonstrated by the recent deterioration in earnings and subsequent downgrades through the second half for other retailers, while weak sector sentiment should also weigh.

Every Day Low Prices

The company is making changes to pricing and increasingly shifting to "every day low pricing" versus a previous high/low discounting model. Morgans observes this will expand to include the company's core range of car seats. The importance of the car seat lies with the fact it is a product that is purchased new and in person because of the safety focus.

The company appears to be positioning this way as a defence strategy in an increasingly direct-to-consumer world and has also launched a branded eBay marketplace to provide an additional channel. Macquarie expects increased investment and a shift towards this model will constrain margin growth in the short term.

On FNArena's database there are three Hold ratings and one Buy (Morgan Stanley). The consensus target is $1.89, suggesting 12.4% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 4.9% and 5.5% respectively.
 

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