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Date : 15/03/2021

Baby Bunting Group

ASX :

BBN

Market Cap : $709.61 Million

Dividend Per Share : $0.05

Dividend Yield : 2.19 %

Buy

52 Week Range : $1.51 - $6.13

Share Price : $5.57

Baby Bunting is growing its private labels, increasing market share and entering new markets. We issue a "Buy" recommendation to medium and long term investors.

Company Analysis

Baby Bunting Group (ASX: BBN) as the name suggests sells baby goods. They are Australia’s largest retailer of speciality baby goods with 59 stores across 5 states in the country. Baby Bunting also has a presence on eBay as an authorised seller – an additional online sales channel. In the first half of FY2021, BBN opened 3 new stores and they are now closer to realise their strategy of opening 100 stores across the nation.

As stores closed due to lockdowns induced by the pandemic, consumer discretionary spending moved online, and the competition intensified. Retailers benefitted from all the money that Australians were now spending shopping. This resulted in spectacular performances across the entire sector, and it has been no different for Baby Bunting. The H1 FY2021 results showed:

  • 16.6% growth in sales to $217.3 million over the previous corresponding period
  • Store sales growth was 15% during the period – mainly led by prior to lockdowns and states except Victoria
  • Total online sales growth was 95.9% as click and collect grew 218% and contributed massively
  • Baby Bunting reported gross margins of 37.4% – up 41 bp
  • EBITDA increased 29.7% – driven by increase in online sales
  • Net Profit after Tax grew 54.7% to $7.5 million


Source: Tradingview.com

Much like the performance, Baby Bunting shares surged as well during the period. After recovering quickly from the pandemic crash in March 2020, Baby Bunting shares have surged over 100% in the 1-year chart. In the chart above, it can be seen that Baby Bunting shares have outperformed the ASX-200 during this time as well (orange line).

There are 4 key areas that Baby Bunting has to concentrate on to keep growing:

  • Increase Private Labels
  • Invest in Digital or eCommerce
  • Enter New Markets
  • Grow Market Share

A growth in all of these 4 areas is critical for the sustainable growth of Baby Bunting.

Private Labels

Baby Bunting has several brands across a wide range of products. In addition to being a third-party products retailer, they have also been expanding their own private labels and brands. In FY2020, the sales of private labels and exclusive products made up 36.5% of the overall group’s sales. Baby Bunting has a long-term target of continuing to increase their private labels so that it accounts for 50% of their sales. Increasing private labels is extremely important for the long-term sustainability of a retailer. This is because, Baby Bunting will gain control of the production costs and this will ultimately increase their EBITDA margins in the long run. The private labels and exclusive product sales grew by 47.9% in FY2020.


Source: Baby Bunting

Out of the top 250 product sales for the firm, these private labels made up 46%. It shows that their strategy is working. Baby Bunting is able to make products and they are also able to convince buyers to pick their private labels over the 3rd party products that they have used.

eCommerce or Online Retail

With stores closing due to lockdowns, retailers who had already established an online presence with significant investments won the battle for customers. Online sales went up 95.9% during the period and it represents close to 20% of the total sales that Baby Bunting generated.

Website visits continued to grow, and unique visits were over 14 million during the half year – up 39% over the previous corresponding period. Click & Deliver sales grew 50% and Click & Collect grew by 218% – representing 55% of all the online sales.

Online fulfillment of order increases the profit margins for Baby Bunting. Online sales require much lower costs to sell goods as the fixed costs of operating a store is non-existent. Baby bunting continues to be investing to improve the customer experience in digital. Investment is being made into the improvement and enhancement of the website, its architecture, online fulfillment centres.


Source: Baby Bunting

New Market Entries

Baby Bunting is launching in New Zealand. The firm has announced that their assessment of the opportunity is complete and that they are now planning to launch an omni-channel retail chain in New Zealand. The initial plan is to open over 10 stores in New Zealand in addition to the eCommerce presence that Baby Bunting will concentrate on. The openings are expected to be FY2022.

The market research reveals a NZ$450 million opportunity in New Zealand. The Kiwis also have a higher online retail adoption than Australians. This means that Baby Bunting should be able to leverage off their online presence to drive sales and not rely on just the store openings.

There is no large format speciality baby retail chain in New Zealand either. This significantly de-risks the investment that Baby Bunting is committing in entering this new market. The private labels and exclusive product offerings of Baby Bunting will also play a crucial role in the firm gaining market share in New Zealand.


Source: Baby Bunting

Growing Market Share

While discretionary products is what makes up the majority of Baby Bunting’s products, several of their maternity and baby goods can also be classified as essential products for parents and babies given that they are required.

Their continued growth as a group shows how Baby Bunting has been growing market share slowly but steadily. They have implemented competitive pricing as a strategy, and this always increases market share because of the direct relationship it has with purchase drivers. Baby Bunting made good progress during the half with its transformation projects to support future growth. This progress includes the development of a new loyalty program (with additional elements to be launched in 2H FY21), a new merchandise planning and forecasting system as well as progress of a new purpose-built DC in Dandenong South to replace the existing facility which is expected to go live in the coming months.

Financial Health

Baby Bunting has $14.7 million in cash at the end of the half year period. Their inventories grew by $12 million as there were new store openings and higher demand for products during the period. The stock in hand at the end of January was approximately $85 million.

Net debt increased by $4 million in order to fund these inventory increases. Their total assets outweigh their total liabilities by 1.47x. The Net Asset position is $95.5 million. The total debt the firm has stands at $135 million. This raises a red flag as far as capital structure is concerned. Baby Bunting is capitalised by debt up to 58% and the remaining 42% by equity.

Outlook and Valuation

Comparable store sales growth for the first 6 weeks of the second half of FY2021 was strong at 18.5%. This has seen comparable store sales growth rise to 15.7% year-to-date. A new store at Westfield Belconnen is due to open in March with the potential for another store in the second half. There is a strong pipeline of new stores anticipated for FY22. There are also developments expected on the investments BBN is making in New Zealand. Online sales we expect will continue to be resilient given the product mix that Baby Bunting has in its locker.

The strong performance in the first half of the year also led to an increase in dividends. The interim dividend paid out by Baby Bunting was 5.8 cents a share. The investment case for Baby Bunting is strong:

  • Management owning shares is a very comforting sign for long-term investors. The management collectively owns $23 million worth of BBN shares. CEO Matt Spencer sits in his position with $5 million worth of shares, and directors Gary Levin and Ian Cornell also own 750,000 shares together. Close to 50% of team members of Baby Bunting are shareholders due to their employee share plan. This points to belief being formed around the strategy that Baby Bunting has taken up and it looks like it is on its way to dividends in the future.
  • Baby Bunting is the largest player of baby goods in Australia, and they have no pure-play competitor that they can see in their rear-view mirrors. Their main competitors as things stand are the likes of Amazon, Kmart, Target, etc. They have about 15% market share in the market for baby products. This, however, has been increasing slowly and steadily. Their 100-store plan is underway, and Baby Bunting is investing consistently to increase their offline store count and their online presence and infrastructure. This is an essential and the first part to their growth strategy.
  • In addition to the traction that Baby Bunting has been gaining off-late, their timing of entry into New Zealand looks to be on-point. Baby Bunting looks to be targeting 10 stores in NZ initially. The road to the top in New Zealand may not be as straightforward as the one in Australia given the competitive landscape, we pointed out earlier in the report. However, the largest competitor in NZ has 25 stores and the initial 10 stores should already give Baby Bunting enough ammunition to compete. In addition to this, Baby Bunting’s private labels have done very well, and they are continuing to expand their range at very competitive price points.
  • We have all heard anecdotal stories of how there is a baby boom due to the pandemic restrictions that were imposed. JobKeeper has also played a very large role for the baby boom during this very financially challenging period. It is no secret that we have an aging population here in Australia, and a baby boom is desperately needed for the country’s long-term economy. An improvement in demographics is desperately needed and there has been strong indication that political parties will now be looking at policies that will encourage a shift in these demographics by introducing various rebates and aids for childcare.

The bottom line is that Baby Bunting can grow organically and there also looks to be favourable government policies coming their way by virtue of Australia trying to decrease the average age of their population. Hence, we have incorporated this into our valuation. The estimates chart in the above section assumes a conservative 10% CAGR in revenues for the next 3 years. The private labels growth and expanding overall revenues will point towards an increase in the all-important EBITDA margins for Baby Bunting. We are expecting these margins to go from around 9% to about 15% in the short to medium term. These conservative assumptions already point towards a robust future for Baby Bunting, and this is exactly why the market also demands a rich valuation.

Based on the current capitalisation and our projected earnings, here are the multiples that Baby Bunting shares are trading on:

Looking at the P/E ratio of Baby Bunting, we first notice that it is fairly higher than most retail players. This is due to the dominance that Baby Bunting has in its industry and market. They are capitalising on this opportunity and they are able to grow organically – supported by both – micro economic and macroeconomic factors. Currently, the P/E comes in at about 41x and it is seen decreasing fairly quickly over the next few years. The reason is that these are conservative growth rates that Baby Bunting should manage to hit. Any positive surprises that Baby Bunting can throw at the market in a quarter will only send the share price soaring once again. The premise here is that P/E’s are high when expectations are high, and they consistently decrease as these expectations are met and the company grows into what we and the market expect. Thus, the high price comes with a lot of upside potential.

Recommendation

Baby Bunting is a well-run business with a strategic vision of increasing market share and entering new markets. Along with increasing their private labels, they are preparing their entry into the Kiwi market later this year. A good balance sheet, and a rich price that is supported by growth forecasts, and supporting macro-economic factors results in us rating Baby Bunting as a “Buy” for medium to long-term investors.

 

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