Australia | Feb 15 2022
This story features BABY BUNTING GROUP LIMITED. For more info SHARE ANALYSIS: BBN
Brokers were generally upbeat regarding first half results for Baby Bunting and see a continuation of positive trends along with further upside from growth initiatives.
-Baby Bunting’s first half results beat the consensus estimate
-Margin savings from a new distribution centre and changed product mix
-Impressive second half momentum
-Expected continuation of positive trends
By Mark Woodruff
In a period of volatility for ASX-listed retailers, growth prospects for Baby Bunting ((BBN)) are thought to be less risky than other high-multiple retailers, which rely to a greater extent on new markets and acquisitions.
As a result, Citi believes the company is well placed to outperform the broader small cap retail sector, as specialty baby goods are considered non-discretionary.
This comes as management unveiled first half results well ahead of the consensus estimate. The gross profit and gross margin demonstrated the benefits of scale and supply chain investment, noted Morgan Stanley.
Permanent margin savings were potentially created by the opening of a new distribution centre, while an increasing proportion of sales are now for higher margin private label and exclusive products.
A further dissection of sales within the half reveals a significant turnaround. For the first 14 weeks like-for-like sales growth was lagging at -1%. Then, Citi estimates, sales growth accelerated to 16% over the last 12 weeks of the half, driven by the reopening of NSW and Victoria and strong cyber weekend sales.
Moreover, momentum into the second half was impressive, according to Morgan Stanley, with 3.6% comparable store growth in the first six weeks, underscoring an ongoing market share story.
In further good news, management is looking to expand its addressable market by increasing its presence within categories such as apparel and toys. The company's current addressable market of $2.5bn is less than half of the overall Australian baby goods market, due to a limited presence within the clothing, food and nappy categories, notes Citi.
In summary, Ord Minnett expects the trends of above-market sales growth, improved gross profit margins and strong cost control to be maintained in the medium term, driving strong shareholder returns.
In the first half, gross margins were 192 basis points higher than for the same period last year. Morgans partly attributes this to improvements in mix and distribution, and believes such gains will be sustained into the second half.
Over the medium to long term, Citi sees scope for earnings margins to materially improve due to improved sales from investments in online, loyalty and data analytics. Further, higher gross margins are expected from a continuation of growth in private label/exclusives. These products now comprise 44.5% of total sales, up from 41.4% in FY21.
The Company’s National Distribution Centre and Store Support Centre, at Dandenong South in Victoria, were operational for the entire half.
Citi sees sees upside to margins from such supply chain initiatives, which include re-routing direct to store suppliers to the new distribution centre.
Plans to expand the company’s addressable market implies to Morgans greater space will be allocated to nappies and babywear, which could see further comparable store sales growth in future years. While consumables are likely to attract lower gross margins, it’s thought better sales density will result in improved economics for stores.
Apart from this upside, Citi sees growth emanating from a ramp-up of new stores, margin expansion and store rollouts.
Management has an unchanged target of 110 stores over time. This includes ten for New Zealand, where the rollout has been delayed due to covid, with the first two stores now expected in FY23.
Finally, Macquarie notes the six-month rolling growth in Medicare ultrasound scans remains robust, further validating the covid-19 baby boom theory.
Shareholders will welcome the 6.6cps interim dividend, which rose by 14% year-on-year.
The FNArena database has five Buy ratings. The consensus target is $6.38, suggesting 22.6% upside to the last share price. Targets range from $6.00 (Morgans) to $6.90 (Morgan Stanley).
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