Australia | Aug 17 2021
This story features BABY BUNTING GROUP LIMITED. For more info SHARE ANALYSIS: BBN
Despite an adverse initial share price reaction to FY21 results for Baby Bunting, brokers maintain an eye on the long-term opportunity.
-Baby Bunting achieved a 34.6% increase in FY21 underlying profit
-Significant store roll-out and operating margin enhancement opportunity
-Well positioned for market share growth
-Free cashflow leverage limited by logistics investments
By Mark Woodruff
Despite the initial negative share price reaction on the day of Baby Bunting’s ((BBN)) FY21 results last week, brokers are far from throwing out the baby with the bathwater.
The company operates a network of 60 stores across Australia and plans to add 10 stores in FY22, eight in Australia and two in New Zealand, as it expands to its overall target of 110 stores.
Baby Bunting primarily caters to parents with children from newborn to three years of age, with more than 6,000 products procured from a wide-range of third-party brands and suppliers. This is in addition to private label and exclusive brand products. There are 900,000 children up to three years of age in Australia and 600,000 families are active members of the company’s loyalty program.
The general feeling by brokers is the share market was spooked on results day by comparative sales figures showing potentially negative covid impacts, with a slow first six weeks of the new financial year. By not providing any forward guidance due to covid uncertainty, the company potentially exacerbated any negative reaction.
However, lockdowns are temporary and there is plenty of evidence that demand is deferred, not lost. If you are having a baby, you may be able to defer some spend in the very near term, but ultimately, these purchases are non-discretionary, notes Morgan Stanley.
In addition, Medicare scan volumes rose 4-6% in the second half, which results in FY22 tailwinds on a six-month lag basis.
Like-for-like sales have also been improving over the past few weeks and the broker thinks sales on a comparison basis would be positive to start FY22, but for the lockdowns.
Key features of the FY21 result included a 34.6% increase in FY21 underlying profit, and a 15.6% increase in sales, with comparable store sales growth increasing by 11.3%, well above the 4.9% in FY20.
Underlying earnings (EBITDA) also increased 20%, while margins rose 50 basis points to 15%.
Despite Ord Minnett’s investment thesis remaining on track, FY22 and FY23 forecasts were lowered by -7.6% and -7.3%, given the adverse recent impact of lockdowns. The broker lifts its target price to $6.65 from $6.50 and retains its Buy rating.
The analyst expects growth will be driven by organic sales growth opportunities through market share gains, increased online sales penetration and add-on services. The significant store roll-out opportunity and operating margin enhancement via improved scale and investment will also assist. Macquarie echoes this thesis.
Despite FY21 profit exceeding its expectations by 3%, Morgans downgrades its rating to Hold from Add as the share price had come within 10% of valuation.
The broker’s FY22 and FY23 EPS forecasts are lowered by -2% and its 12 month target price falls to $6 from $6.39. However, Baby Bunting is considered very well positioned to further grow market share and compound growth for investors.
Macquarie increases its target to $6.15 from $5.80.
Ord Minnett highlights strong second half gross margin expansion comfortably offset higher operating expenses. Mature store level margins now sit at 19% from 17% previously, which provides upside to the long-term group earnings (EBITDA) margin target of 10%, which is now estimated to be 12%.
Citi also believes long-term growth prospects are still intact. Should the impacts of covid-19 continue for longer than expected, Baby Bunting is considered better placed than most other listed retailers given the category's non-discretionary nature.
However, like Morgans, the broker lowers its target price on forecast earnings changes and downgrades its rating to Neutral from Buy on concern FY22 multiples don't adequately reflect the risk of covid-19 disruption.
The broker’s target price falls to $5.90 from $6.22, despite citing like-for-like sales have improved into the positive since week four of the new financial year, and noting the opening of eight stores over FY22 should offset the New Zealand rollout delay.
Where’s the long-term opportunity?
Baby Bunting has grown sales 29% over the period FY19-21, improved its unit economics and aggressively reinvested. Morgan Stanley believes the main prize is for potentially over $1bn in sales at low-mid-teens margins.
Additionally, there is loyalty dominance. The 25,000 new monthly members spend 36% more than non-members, and a more targeted loyalty version is anticipated by September.
Finally, e-commerce sales grew 91% to 19% of total sales in FY21. The company fulfills 90% of metropolitan online delivery orders on the same day. When this is combined with loyalty and the more than 40% of private label and exclusives sales, Morgan Stanley concludes it’s hard to compete with Baby Bunting.
Given strong pre-natal scan data and an aversion toward used goods during covid, Morgan Stanley lifts EPS forecasts for FY22 and FY23 by 2% and 3%, respectively, and raises its price target to $6.90 from $6.30.
As covid has clearly impacted the company’s ability to roll-out new stores on time, Morgan Stanley shifts the benefit of the FY22 roll-out more into FY23.
While the company has doubled sales over the past five years, this has required significant digital and physical logistics investment. Some investors rightfully point out that it limits free cash flow leverage though Morgan Stanley feels the incremental return on invested capital (ROIC) is compelling.
FNArena’s database has five broker ratings with three Buys, two Neutrals and a consensus target price of $6.32, which signals 16.8% upside to the last share price.
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