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Date : 15/08/2022

Baby Bunting

ASX :

BBN

Market Cap : $611.95 Million

Dividend Per Share : $0.156

Dividend Yield : 3.37 %

Buy

52 Week Range : $3.500 - $5.990

Share Price : $4.62

Margins and market share continue to expand. NZ entry will drive growth further. A 'Buy' from us.

Company Analysis

Baby Bunting (ASX: BBN) released its FY22 results, wherein the company has had a successful year, with its total sales reaching half a billion dollars for the first time. They have also continued to grow their market share in the industry and enhanced their profitability by increasing margins during an inflationary environment.

On the same day as the results, Baby Bunting also began the much-awaited rollout of its New Zealand stores, with the first store opening in Auckland.

Business Performance

Baby Bunting reported a statutory net profit after tax of $19.5 million, up 14.6%. On a pro forma basis, NPAT was $29.6 million, up 13.6% from pcp and pro forma EBITDA was $50.5 million, up 16.1%.

The core Australian business (excluding the New Zealand start-up costs) performed strongly with a pro forma NPAT of $31.1 million and achieved a pro forma EBITDA margin of 10.4%.

This strong result was underpinned by:

  • Total sales of $507.3 million, representing a growth of 8.3% (pcp).
  • Comparable store sales growth was 5.0% for the year. On a two-year basis, sales have grown impressively by 25.2% or $102.1 million.
  • Online sales (including click and collect) grew 24.2% to $112.7 million and now makeup 22.2% of total sales.
  • Click and collect grew 28.2% to 10.4% of sales.
  • Four new stores opened during the year.
  • Gross profit for the year was $195.8 million, an improvement of 12.7% on the pcp.
  • The gross profit margin has improved by 151 basis points to 38.6%.
  • Private Label & Exclusive Products sales grew 18.3% to be 45.3% of total sales (FY21: 41.4%)

BBN’s costs increased only marginally. Pro forma costs of doing business (CODB) as a percentage of sales were 85 basis points higher year-on-year at 28.6% of sales. This reflects continued investment in their team, national Distribution Centre, and systems to support the expanding store network and to improve customer experience in-store and online.

Financial position and dividend

Baby Bunting’s balance sheet is strong with minimal debt (net debt $0.7 million at year-end) as its operating cash flows continue to fund its growth program. During the year, the company renegotiated and extended its $70 million banking facility with NAB, with the facility now maturing in March 2025.

Noting the Board’s target of paying dividends equivalent to approximately 70% of the company’s pro forma NPAT, the Board has approved a final dividend of 9.0 cents per share fully franked. This takes the total dividend payment for FY22 to 15.6 cents per share.

Investments are making a mark

The company successfully transitioned its digital technology to a new headless architecture, and the Australian website was switched to the new platform in January 2022. This went smoothly and enabled the building of new features and experiences for customers.

Baby Bunting’s transformation program, primarily focused on transitioning business systems to modern platforms, made good progress. The new headless e-commerce architecture was initiated, and the loyalty program “Baby Bunting family” was launched and is now available across all channels.

These investments are aimed at increasing online revenue and the stickiness of customers. They are proven strategies employed by e-commerce giants.

Growth Opportunities

Baby Bunting’s growth opportunities are expanding. Historically, Baby Bunting’s estimated addressable market has been $2.5 billion, which was based on a targeted age range (0-3 years) and reflected the planned store network and online sales.

Through new initiatives, Baby Bunting believes it can expand its addressable market opportunity to $3.5 billion, primarily through the growth of online and expanding certain category ranges beyond 0-3 years. The initiatives supporting the expansion of the addressable market opportunity include:

  • expanding the online range and availability;
  • growing and further leveraging the store network;
  • introducing marketplace to further extend the range with more products, more brands and more suppliers.

Baby Bunting has commenced building out its online range by opening up more store inventory to fulfil online orders. During the year, BBN has updated its store network plan and plans to grow its network in Australia to over 110 stores (up from 100 stores), along with its network plan to open more than 10 stores in New Zealand.

Work has commenced on establishing a Baby Bunting marketplace that will facilitate first-party drop ship sales and the sale of third-party products. The marketplace is expected to launch in the second half of FY23.

FY23 Trading Update

While Baby Bunting did not provide guidance, they did report that FY23 has begun positively. As on 10 August, comparable store sales were 15.3% year-to-date (cycling negative 6.4% in the pcp), and total sales growth has been 19.3%. We expect comparable store sales growth to moderate as the company cycle periods are affected by lockdowns throughout Australia.

BBN is looking at opening at least six new stores in Australia in FY23, including the store at Hornsby (NSW), which opened on 5 August 2022. In addition to the Albany, the Auckland store opened on 12 August, and BBN is anticipating opening a second New Zealand store in Christchurch in the second half of FY23.

The previous report can be viewed by clicking here.

Recommendation

Baby Bunting has seen good positive growth in sales during a challenging year. Profit margins are up, the company is increasing market share, and BBN’s growth prospects are robust. Dividends are also healthy at over 3%, fully franked, and FY23 is off to a positive start. We continue to recommend a ‘Buy’.

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