Competitor Failures Bitter Sweet For Baby Bunting

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

The baby goods retail industry has had its share of failures recently which puts Baby Bunting in the spotlight.

-Heightened discounting creates downside risk to Baby Bunting's FY18 earnings
-Pressure on gross margins evident
-Stabilising of industry conditions considered unlikely
 

By Eva Brocklehurst

As administrators circle several of its competitors, Baby Bunting ((BBN)) has come to the fore. Further out, fewer players may provide a more solid industry structure, although brokers suspect the near-term impact could be more mixed.

Administrators have been appointed to Baby Bounce (10 stores across NSW/QLD) and Baby Savings (4 Sydney metro stores), Australia's third and fourth largest specialty baby goods retailers by store count. This comes after a series of closures of other baby goods stores in the first half.

Citi believes the news increases the downside risk to Baby Bunting's FY18 operating earnings (EBITDA) guidance of $23m, largely because of clearance activity. The broker last month downgraded the stock to Sell because of the increased risk from competitor closures.

Analysis indicates 93% of these latest two businesses to go into administration are located within a 20km radius of a Baby Bunting store. As a result, clearance sales could adversely affect the fourth quarter result and limit the potential for the company to take over store locations.

That said, same store sales grew 4.7% in the third quarter, an improvement on the 4.5% in the first six weeks of the quarter. Yet, Macquarie observes pressure on gross margins is evident, amid increased discounting.

The company's FY18 guidance is based on the stabilising of industry conditions and this appears unlikely, in the broker's opinion. Morgan Stanley also notes recent commentary surrounding pressure on margins and estimates a -20 basis points decline year-on-year in second half margins.

Risks to other operators continue, such as Babies R Us/Toys R Us in Australia following the bankruptcy of the US parent. Morgan Stanley notes Babies R Us is the only player of scale and the US parent intends to sell or close some of its international stores, which may include Australia.

Amazon

Over the medium term the exit of competitors is a positive for Baby Bunting, Citi concedes, given the prospects for market share gains. It also is likely to increase the company's bargaining power with suppliers and landlords and provide access to a greater share of exclusive products.

Still, Amazon may play an increasing part, as suppliers consider alternative channels in order to diversify customers and reduce the reliance on a major player.

Macquarie also notes Amazon's “Prime” offering is a potential de-stabiliser and will mean the baby goods category remains in focus and competition strengthens. The broker requires evidence of a sustained improvement in performance and market conditions before changing its Neutral recommendation on the stock.

FNArena's database has two Buy ratings, one Hold and one Sell. The consensus target is $1.58 signalling 20.8% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 5.2% and 5.8% respectively.

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