Baby Bunting Running Strongly

This story features BABY BUNTING GROUP LIMITED. For more info SHARE ANALYSIS: BBN

Baby Bunting has confidently reiterated earnings assumptions for FY20, with an expanded gross margin being the main surprise in a detailed trading update at the AGM.

-Strong outlook as unusual trading conditions now cycled through
-Opportunities in shopping centres still exist
-Strongest earnings outlook among discretionary peers, Macquarie asserts
 

By Eva Brocklehurst

Baby goods retailer Baby Bunting ((BBN)) is confident, outlining strong earnings momentum and planning 5-6 new stores in FY20. The company's trading update for the first 14 weeks of FY20 revealed a slowdown in like-for-like sales growth to 3.1%, implying 1.6% in the final eight weeks of the period. Technical issues with the website, now fixed, also affected sales conversion and customer experience.

While like-for-like sales imply a deceleration versus the first six weeks, brokers point out this reflected the cycling of unusual trading conditions in September 2018, including the Babies "R" Us closure and heavy clearance activity.

At its AGM, the company reiterated FY20 operating earnings (EBITDA) guidance of $34-37m and net profit of $20-22m. A gross margin of 36.6% was obtained to date, up 270 basis points and ahead of most broker expectations.

Management expects this level of gross margin performance to persist through FY20. Seasonally, the first quarter is usually a lighter period for sales but Macquarie suggests, given the strength in margins, the mid to upper end of guidance is achievable.

With competitor closures and clearance activities now cycled Citi expects gross margin improvement to continue in FY21 and FY22, as the penetration of private-label and exclusive products increases towards the long-term target of 50%.

The company opened one new store and expects to open another two in the first half of FY20. As the competitive landscape has improved there are new growth opportunities in shopping centres. More shopping centre stores, which have a greater proportion of higher gross margin consumables and soft goods sales, are being rolled out.

Morgan Stanley asserts Baby Bunting is under-penetrated in shopping centres. The store network plan is currently under review and could be a positive catalyst in the next few months. Citi envisages upside to the long-term roll-out target of 80 or more stores given the success of the shopping centre format, on the back of the fact four of the company's largest competitors have closed down.

Baby Bunting possesses the strongest earnings outlook among discretionary retail peers, in Macquarie's view, with visible growth drivers and a relatively defensive category, amid lower online threats. Morgans, too, considers the business well-placed for growth, being the only national baby goods retailer, and now forecasts FY20 operating earnings of $36.9m and net profit of $21.2m.

Baby Bunting appears more in control of its growth compared with most other retailers, the broker adds. The main risks include Amazon, a falling Australian dollar and weaker consumer sentiment as well as higher than expected rates of store cannibalisation. Guidance does exclude significant project-related costs, Morgans points out, which will be taken below the line and not affect the dividend.

FNArena's database has four Buy ratings for Baby Bunting. The consensus target is $3.72, suggesting 3.9% upside to the last share price. This compares with $3.17 ahead of the update.

See also, Baby Bunting's Growth Spurt To Continue on August 19 2019.

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