By David Boyle
Senior Equity Analyst
The Super Investor
8 am – August 17, 2020
Baby Bunting – BBN
The last one standing …
Baby Bunting is the nation’s largest maternity and baby-focussed specialty retailer, selling hardgoods such as prams and cots, and consumables such as nappies and wipes. This has always been a tough retail category to operate in.
Over the past few years a number of competitors have gone bankrupt. Baby Bounce, Baby Bubs and Babies R Us all collapsed in a short period of time, causing issues with discounting and clearance activity. BBN remains the only national retailer for this category, competing primarily against full-line and discount department stores. Moreover, Amazon entered the Australian market in 2017 with baby products firmly in its sights.
BBN has now seemingly reached the end of that dark tunnel. Clearance activity has subsided, and Amazon has had a far smaller impact than feared. BBN was also spared the pain of COVID-related shutdowns.
The questions for investors now are whether BBN has a clear runway for growth ahead, and what the success case might look like.
FY20 Results summary
Baby Bunting provided guidance to the market in July, so there was nothing unexpected in the financial results for the year to June 30, 2020.
Total sales rose 11.8% to $405m with like-for-like sales increasing 4.9% for the year, the second half materially stronger than the first half. Physical store sales growth was lower than this, with growth being bolstered by a 39% increase in online, now making up 14.5% of total sales for the group.
Overall, EPS increased 33.2% to 15.2cps. The balance sheet had $13m cash at the end of the year.
The only real black mark in the result was a failed IT system overhaul that burned cash and resulted in missed sales. The company took almost $10m worth of transformation expenses below the line, and there will be about $4m of these expenses again in FY21.
The company provided commentary on the COVID-19 impacts to the business through the period. All stores remained open, no government assistance was requested, and about $0.5m in additional costs was required to meet higher cleaning standards and staff absences. In the middle of the lockdown, baby essentials and furniture grew strongly at the expense of prams and car seats. This mix has now returned to normal.
BBN is a solid retail business
Stable management team ... CEO Matt Spencer has been running the company since 2012 and has a material shareholding, although he has been reducing his holding over time. CFO Darin Hoekman has held his position since 2016.
Store roll out ... BBN currently has a network of 56 stores, growing by around 6 stores per year. The previous plan was to reach 80 stores at maturity. At this result, it was extended to a potential network of 100.
Like-for-like sales growth ... Despite a disruptive few years, the company has been steadily growing like-for-like sales. BBN has been doing this by increasing market share and broadening the range of products it sells, as well as improving the online offering and benefitting from the maturity of newly opened stores.
Higher gross profit … Baby Bunting is growing its private label/exclusive products offerings which make up 36.5% of sales, up from 27.6% last year. For the year, gross margin improved from 35.0% to 36.2%. Competitors are falling away and this should result in a more rational pricing environment. The chart below highlights the key retailers that are left. It is not only the specialty chains that are disappearing. Target, Myer and David Jones are shrinking their store networks too.
Source: BBN FY20 Results presentation.
Controlling costs … As retailers grow, some costs such as rent, head office and marketing should grow more slowly than sales growth, leading to margin expansion. This is one area where BBN hasn’t performed too well. Store expenses, marketing and overheads have remained a consistent proportion of sales as the company has found itself needing to reinvest in service levels.
How big can BBN get?
Baby Bunting has provided a number of aspirational targets for key financial lines. The forecasts in the table below are based on what the company has provided in presentations, plus necessary assumptions needed to calculate other items:
Source: Company presentation, analyst assumptions.
The store footprint will move into some regional areas and new formats, blending down average sales per store. Margins can increase due to product mix, better pricing power and cost control. If achieved, EPS could more than double, and the PE multiple based on these targets and the current share price looks quite reasonable at 13x.
The company was not willing to give guidance for FY21 due to “significant uncertainty, with the risk that trading conditions will fluctuate greatly throughout the year”. It did, however, disclose that like-for-like sales for the first six weeks of the year were 20% higher than a year ago, even higher excluding Victoria.
That is very strong compared to results achieved in recent periods, so it should be expected that it will moderate through the year. Still, this is an excellent start.
Four to six new stores will be opened in FY21, broadly in line with recent years.
The company commented on the ever-present threat of online competition. Amazon has now been in Australia for over two and a half years, and its impacts on most retail categories have been limited. BBN claims that about 77% of its top selling products cannot be purchased on Amazon, and that customers enjoy using BBN’s click and collect service.
The threat is benign at the moment, but Amazon has used baby/mother categories as a spearhead for growth in other markets, and this needs to be monitored for any change as the key risk going forward.
Analyst forecasts will be upgraded for FY21 but the magnitude is uncertain, depending on the amount of conservatism applied to the retail outlook for the rest of the year. Assuming 10% like-for-like growth for the full year would see EPS increase to around $0.18 from $0.15 in FY20, and a FY21 PE ratio of 23x at the last price of $4.15.
This places BBN towards the upper end of valuations for a retailer. But the current growth outlook is positive, and any moves towards aspirational store numbers and margins would see these multiples steadily reduce.
BBN has shown itself to be a good operator in the face of a highly disruptive few years. With a clearer path ahead it should be able to maintain good earnings growth.
Disclosure: The author does not hold shares in BBN.
Neither The Super Investor nor the author has received [or will receive] any benefit whatsoever from any party at all for the publication of this article.
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