Small Caps | Aug 16 2022
This story features BABY BUNTING GROUP LIMITED. For more info SHARE ANALYSIS: BBN
Having delivered record sales in FY22, significant growth continues for Baby Bunting as the company pursues a bigger share of the domestic baby goods market through growth initiatives.
-Baby Bunting delivered record sales exceeding half a billion dollars in FY22
-The company remains in a growth period
-Store rollout target increased to more than 120 stores; should be complete within a decade
By Danielle Austin
Now that Baby Bunting ((BBN)) has delivered its FY22 results, the market is largely focused on the growth opportunities ahead for the retailer, from ongoing store rollout and geographical expansion to digital to segment and private label expansion.
The company reported solid growth in FY22, with sales up 8% year-on-year to exceed $0.5bn for the first time, but growth initiatives should see the company increase its addressable market.
Having completed four new stores in the last year, not only does the company’s new store rollout continue, but Baby Bunting has lifted its new store target 10% to more than 120 stores across Australia and New Zealand. Guiding to eight new store openings in the coming year, the company is a little over halfway to meeting its target and should reach its final goal in a little under a decade.
While the domestic baby goods market is worth an estimated $5.1bn, Baby Bunting’s current addressable market is just $2.5bn of that. The company has announced intentions to chase a bigger slice of the pie, investing in increasing its presence in the clothing, toys and food segments to increase its addressable market to $3.5bn.
To support this strategy, management announced the launch of an online marketplace platform in the second half of FY23, which the company anticipates will increase consumer awareness of new offerings and support addressable market expansion.
With the retailer reporting continued digital growth in the last year, with online sales up 21% year-on-year and now accounting for 22.2% of total sales, existing web traffic should leverage the new platform while the digital marketplace will allow the company to enhance its online offering.
Private label expansion has also impacted positively on margins for the company, with private label and exclusive product lines now accounting for 45.3% of all sales, up from 41.4% in the previous year, and supporting a 150 basis point gross profit margin expansion.
Analysts are unanimous, anticipate low-risk growth ahead for retailer
Following the release of Baby Bunting’s full year results, five of FNArena’s database brokers have updated on the company, and all are Buy rated or equivalent. Between them, these brokers have an average target price of $5.70, ranging from $5.00 at the lower end to $6.00 at the upper end.
Macquarie (Outperform rated and with a target price of $5.90) notes Baby Bunting’s FY22 revenue was in line with the broker’s expectations, while net profit was 3.8% ahead.
The Macquarie analysts highlight Baby Bunting operates in a less cyclical segment than retail peers, but does note an anticipated 3% growth in births in FY23 should translate to increased sales of baby goods for the retailer.
Macquarie downgraded earnings per share forecasts -2%, -1% and -1% through to FY25 to reflect changes to revenue expectations. The broker notes trading year-to-date in FY23 is already strong, with the company reporting 15.3% same store sales growth.
Citi (Buy rated with a target price of $5.62) notes a long, relatively low-risk growth ahead for Baby Bunting.
The Citi analysts anticipate the company will continue to face sourcing cost pressures moving into the first half of FY23, but margin growth opportunities should largely offset these headwinds.
This broker estimates expansion into the clothing, toys and food segments could represent a $30m earnings opportunity, leveraged by the retailers’ existing infrastructure, and also sees significant opportunity for the company to increase its penetration of private label brands, and improve margins.
Citi also finds potential for reasonable earnings upside without material investment in the company’s marketplace strategy, and notes a marketplace should help grow consumer awareness of segment expansion.
The analysts at Citi issued downgrades to earnings per share of -4% and -2% in FY23 and FY24 respectively, attributing the declines to lower sales as a reflection of fewer stores and higher costs as the company pursues expansion into New Zealand.
Morgans (Add rated and with a target price of $5.00) notes despite the positive full year result, second half comparable sales growth of 3.3% disappointed expectations, and reflected supply chain constraint headwinds.
Morgans highlights, despite a strong start to the year, it does anticipate comparable sales growth will moderate moving into FY23 as the company cycles results from FY22, while also noting Baby Bunting appears more resilient than other retailers.
The Morgans analysts lowered their FY23 net profit estimates -5% to account for higher cost assumptions in New Zealand, and decreased the earnings margin to 16.1% from 16.4%. This broker sees potential for Baby Bunting to increase market share to 14% of its targeted $3.5bn addressable market in the medium- to long-term.
Both Morgan Stanley and Ord Minnett have a target price of $6 for the retailer, with ratings of Overweight/Industry View In-Line and Buy, respectively.
FNArena's consensus price target of $5.70 suggests more than 17% upside potential from where the shares are currently trading.
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