Small Caps | Oct 07 2021
This story features BABY BUNTING GROUP LIMITED. For more info SHARE ANALYSIS: BBN
While store sales of baby goods may have been hindered by lockdowns, Baby Bunting's update has underscored confidence in the outlook
-Margins benefitting from increased private-label/exclusive product sales
-Total sales growth impacted by shopping centre locations
-Baby Bunting in strong position versus smaller competitors
By Eva Brocklehurst
An AGM update from Baby Bunting ((BBN)) provided much-anticipated confirmation that sales momentum should pick up as NSW, Victoria and ACT shed their combined lockdown status. Total sales growth over the year to date was a modest 1.5%, yet after comparable store sales growth in the first seven weeks of the first half declined -6.4% the following seven weeks increased 3.2%.
The clincher is, taking out NSW and ACT, comparable store sales have increased 10% since August. What is more clear-cut is that online sales have increased 37.7%, despite cycling strong growth in the prior corresponding period.
Citi expects like-for-like sales growth to improve to 9% over the remaining 12 weeks of the first half, as NSW, Victoria and ACT stores benefit from pent-up demand following the lifting of restrictions.
In the second half the rate of growth may be slower, the broker advises, as freight costs remain elevated. Citi now expects a gross margin of 38.6% because private-label/exclusive product sales continue to grow. Gross margins are currently 38.7% and have benefited from an increase in private-label and exclusive products and these now represent 44.3% of total sales.
Supply chain issues are not complicating things either, with availability currently sitting on more than 95% amid limited shortages.
Shipping costs may be elevated yet Baby Bunting has managed to contract rates to the end of the first half and limited price increases by leveraging efficiencies from the recent investment in the supply chain.
Morgans notes some inflation in the cost of goods sold because of higher freight rates and sourcing challenges but points out the company has no reliance on airfreight. Still, this dynamic provides reason to be somewhat cautious about margins as the year progresses.
As a result of the AGM update, Ord Minnett is confident its investment thesis is intact while the update also delivered on Morgan Stanley's expectations. The latter considers Baby Bunting one of the highest quality small cap retailers in the country, firmly holding its position in an attractive non-discretionary category.
Morgan Stanley reiterates an Overweight rating and Citi does so too, with a Buy rating, assessing the company has a range of multi-year growth strategies. The exclusive/private-label roll-out is progressing faster than previously anticipated, resulting in gross margins that were also better than expected.
Was there a negative? Despite like-for-like momentum improving, total sales growth was soft. Citi explains this is likely to be because three out of the four new stores that opened in FY21 were located in shopping centres, and these have been more adversely affected by reduced foot traffic compared with the large format retail venues.
Regardless, Baby Bunting has a dominant market position and combined with investment in inventory the broker believes it is in a better position compared with its smaller competitors.
Morgans upgrades to Add, given the sales and margin trends. The broker concludes, as the only nationwide specialty retailer of maternity and baby goods, Baby Bunting can take market share from non-specialist competitors such as department stores, and also build a strong presence online, highlighting Baby Bunting has less than 20% of a $2.5bn addressable domestic market.
New Zealand represents another growth driver with new stores opening later in 2021 and, Morgans suggests, could provide a template for further geographic expansion in the future. Still, entering a new market brings risk and the broker will be following sales data from New Zealand closely.
Macquarie is also on board, retaining an Outperform rating and suggesting sales and margin trends, as well as the store rollout, support the outlook.
FNArena's database has six Buy ratings for Baby Bunting. The consensus target is $6.39 which suggests 12.8% upside to the last share price.
See also, Baby Bunting To Bounce? On August 17, 2021.
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