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Date : 17/08/2021

Baby Bunting

ASX :

BBN

Market Cap : $741.03 Million

Dividend Per Share : $0.083

Dividend Yield : 2.58 %

Buy

52 Week Range : $3.60 - $6.65

Share Price : $5.45

Strong earnings result and a healthy dividend yield. We recommend investors to "Buy".

Company Analysis

Baby Bunting (ASX: BBN) is Australia’s largest speciality nursery retailer and one-stop-baby shop. BBN provides an unrivalled selection in all the best brands across prams, car seats, cots, nursery furniture, highchairs, bathing, feeding, home safety, toys, and babywear. Currently, BBN has an impressive addressable market estimated at $2.5 billion. The group has a solid network of 100+ stores nationwide and is expecting to launch into New Zealand by the second half of FY22, a potential $429 million market opportunity.

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Source: Baby Bunting

The Baby Bunting share price dropped by 4.5% following the release of its full-year results. BBN reported stellar performances across the board with profit growth in FY21. However, the good performance was overshadowed by a soft beginning of the new financial year. For FY21, Baby Bunting recorded an increase in total sales of 15.6% year-on-year to $468.4 million. Revenues were driven by strong comparable-store and online sales. BBN saw its “click and collect” increase in popularity which underpinned its online sales revenue which more than doubled during the period. Furthermore, its Private Label and Exclusive Products sales contributed as well to the company’s sales growth by adding up to 41.4% of the overall revenues. Baby Bunting put significant effort into developing its Exclusive Products and its Private Label as the firm believes that this product category will drive long-term growth. BBN has a long-term target of 50% of sales coming from this category.

In the bottom line, the company’s pro forma net profit after tax went up by 34.8% to $26 million. This was bolstered by gross margin expansion and improved operating leverage. It is also worth noting that this was achieved without any JobKeeper payments or rent relief. All in all, Baby Bunting exhibits solid fundamentals and we are convinced that the company is well-positioned for earnings growth in FY22 and onward.

The pullback on BBN share price today was in our opinion, investors overreaction from the worries that the COVID-19 pandemic continues to create significant disruption that could affect the company’s FY22 prospects. In our opinion, if we look at the company’s past performance, we can see that any short-term sales moderation caused by lockdowns is recovered relatively quickly once COVID measures have eased. Baby Bunting’s strong sales and comparable store sales growth were also achieved during a year interrupted by lockdowns around Australia; hence, we are confident in the company’s ability to keep on its earnings growth, and we think that the recent correction is just temporary before BBN shares reflect the strong fundamentals of the company.

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Source: Baby Bunting

FY22 outlook: strong nursery brand to support expansion and growth

Baby Bunting will continue to lead the maternity and baby goods retail market. We see in BBN a resilient business as it operates in a less discretionary category with around 300 thousand births a year in Australia. We have seen in the previous years, Baby Bunting’s brand going from strength to strength and is now the most recognisable brand in this category and this is converting into stronger brand preference and engagement. As we have seen BBN expanding its network of stores and its range and services, we expect the company’s growth to continue throughout FY22 and onward. Baby Bunting’s market research shows unaided brand awareness of 88% among consumers shopping for essential baby needs, converting into a very strong brand preference of 71%. With around 1.1 million loyalty members and approximately 600 thousand active members, and around 30 million website sessions during FY21, Baby Bunting has a strong market position which provides the foundations for its ongoing growth.

  • Sales growth: Total sales were $468.4 million, representing a growth of 15.6% PCP. Comparable store sales growth including sales from the online store of $90.8 million was 11.3% for FY21. On a two-year basis, sales have grown impressively by 29.2%.
  • Gross profit and gross margin: Gross profit for FY21 was $173.7 million, an improvement of 18.3% on the prior corresponding period. The gross profit margin has improved by 83 basis points to be 37.1%. This follows on from the 120-basis points improvement in gross margin achieved in the prior year.
  • Private Label and Exclusive Products: Sales grew 31.1% to be 41.4% of total sales. There has been considerable growth in the proportion of private label and exclusive sales and Baby Bunting is tracking well to achieve its long-term target of 50% of sales coming from private label and exclusive products.
  • Operating expenses: The cost of doing business was 27.8% of sales for the year, an improvement of 14 basis points. Leverage was achieved in stores, as store expenses were 19.2% of sales, an improvement of 94 basis points over the year.
  • Digital and online Online sales: Including “click and collect”, online sales grew by 54.2% to $90.8 million and now make up 19.4% of the company’s total sales. Click and collect grew by 110% and made up around 57% of all online sales in catchments where Baby Bunting has a store. This means about 90% of all sales involve a customer store visit in these catchments, reinforcing the criticality of the company’s store assets. Baby Bunting has continued its digital investment in the transition to a headless architecture as the technology foundation for online and digital commerce experiences. The new architecture is already being used for the Baby Bunting website in New Zealand and will be deployed to support the Australian online channel.
  • Expanding store and distribution network: new stores in Westfield Knox (Vic), Coffs Harbour (NSW), Westfield Belconnen (ACT) and Castle Towers (NSW) were opened during FY21. This brings the total store numbers to 60 stores and the company’s network plan is for more than 100 stores around Australia. Online fulfilment hubs have been established at key stores in NSW, Western Australia, South Australia, Queensland, and Tasmania. This network supports the efficient fulfilment of online orders in those catchments with 41% of online orders fulfilled from stores. Baby Bunting’s long-term objective remains to fulfil 90% of online orders in the same day in metro areas. A new National Distribution Centre (NDC) and Store Support Centre were successfully commissioned on time during the second half of FY21 at Dandenong South. At over 22 thousand square metres, the NDC more than doubles the distribution capability and has reduced the reliance on third-party logistics and increased the range of products moving through the NDC. We have seen great improvement in Baby Bunting’s supply chain capability which is a key driver to continued gross margin expansion.
  • Business initiatives and transformation: COVID-19 has impacted the timing of the delivery of some projects, including delaying the roll-out of BBN’s first store in New Zealand to the second half of FY22. It has also had some impact on the company’s transformation programme. Baby Bunting’s transformation programme, which provides a foundation for future growth, has continued through FY21. Many projects were completed during FY21, including brand modernisation, the first phase of Baby Bunting’s new loyalty programme “Baby Bunting family”, the implementation of the demand planning and replenishment tool and the merchandise financial planning software. The transformation program is now expected to conclude in FY23.

Source: Baby Bunting

Revenue forecast and valuation

The strong sales performance allowed BBN to even increase its final fully franked dividend to 8.3 cents per share. With the FY21 interim dividend of 5.8 cents per share, the total dividend attributed to FY21 is 14.1 cents per share which is a dividend growth of 34.1% year-on-year compared to FY20 10.5 cents per share. We expect the dividend per share to continue to grow in the following years. This is supported by solid earnings growth and a serious improvement in the company’s gross profit margin which contributed to the last five years gross profit increase at an impressive CAGR of 16.2%. According to our analysis, we see Baby Bunting continue to report stellar performance across the board for the next 2-year period. Hence, with the ongoing transformation programme and the expansion of BBN to New Zealand, we are anticipating a continuous improvement in EBITDA margin from 16% to 21%. We expect sales to catch up as we remain optimistic with the economic rebound following a return to normal, post-COVID. Regarding the valuation, we conservatively estimate BBN to be relatively undervalued compared to the broad market with a P/E ratio of 25.3x and an EV/EBITDA of 9.64x for FY22.

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Recommendation

Baby Bunting is Australia’s largest specialty nursery retailer and one-stop-baby shop. BBN reported stellar performances across the board with profit growth in FY21, improved operating margins, and overall great execution of its transformation initiative with a plan to expand its footprint to New Zealand despite the impact of COVID-19. We are confident in Baby Bunting to continue to lead the maternity and baby goods retail market. We see in BBN a resilient business as it operates in a less discretionary category with around 300 thousand births a year in Australia. As we have seen BBN expanding its network of stores and its range and services, we expect the company’s growth to continue throughout FY22 and onward. If we look at the company’s past performance, we can see that any short-term sales moderation caused by lockdowns is recovered relatively quickly once COVID measures have eased. Baby Bunting’s strong sales and comparable store sales growth were also achieved during a year interrupted by lockdowns around Australia; hence, we are confident in the company’s ability to keep its earnings growth going, and we think that the recent correction is just temporary bump before BBN shares reflect the strong fundamentals of the company. Therefore, we recommend long-term investors to “Buy”.

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