Company Overview: Baby Bunting Group Limited (ASX: BBN) was incorporated in Melbourne in 1979. The company is based in Dandenong South, Australia and is being currently headed by Mr. Matt Spencer – the Chief Executive Officer & Managing Director. It is one of the largest nursery retailer and one-stop-baby shop in Australia. It aims to provide customers with the widest range of products, high levels of service and low prices every day. Its principal product categories include prams, cots and nursery furniture, car safety, toys, babywear, feeding, nappies, Manchester and associated accessories. Its products primarily cater to parents with children from new-born to three years of age, and parents-to-be. The company operates 48 stores, as well as sells products online. BBN has workforce strength of over 7,00 employees across its all superstores and 11,000sqm warehouse in Melbourne.
 

BBN Details

Growth from Existing Stores and Online – Main Driver of Overall Momentum: Baby Bunting Group Limited (ASX: BBN) focuses on strengthening brand awareness at the domestic level and continuing to invest in improving the customer experience and product offering through an integrated omnichannel experience. As of now, the company has around 48 departmental stores in Australia. Moreover, the group is now seeking to increase the network of stores from the current level of 48 to over 80 stores and presumed that such expansion will increase penetration in Australia Market and provide greater brand visibility. The Company expects to open 6 new stores in FY19 (including Toowoomba which opened in July 2018) comprising of three new stores in H1 FY19 and two stores in H2 FY19, in carefully selected locations matching rigorous selection criteria based on a comprehensive network plan. Baby Bunting has delivered average Comparable Store Sales Growth of 7.12% for the five years to 30 June 2018. The company delivered flatted growth (negative 0.2%) of Comparable Store Sales in FY18 on a Year-on-Year basis. It is noted that 2H comparable store sales revenue was stronger and recorded growth of 1.3% on prior corresponding period (PCP). As at 05 August 2018, the company recorded Comparable store sales growth of 9.8 percent for the first 6 weeks of FY19 and anticipates the same trend to be continued for the remainder of the year.


Number of Stores at Year End (Source: Company Reports)

Low-cost model a key competitive advantage: Its everyday low prices strategy is driven through achieving everyday low costs (both operating and procurement). As per recent customer survey conducted by the Company, Baby Bunting’s most successful marketing tool is now a word of mouth. This is a critical factor in allowing the Company to limit its marketing expenditure to approximately 2% of sales. Further, Baby Bunting is cheaper than Amazon for 36 products, those products are on average 17% cheaper than Amazon, including delivery costs. Baby Bunting also believes its low-cost model has a significant competitive advantage against any price competition from both offline and online trading platform.
 

Benchmarking Analysis (Source: Company Reports)

Gross margin improvement: The Company has generated a gross margin of 33.9% on a 5-year average basis (FY14-18) and expects more than 34% in FY19. However, Gross margin contracted to 100 bps in FY18 on a Year-on-Year basis. It was mainly impacted by significant price discounting by its competitors during the same period. Although, the company managed its margin pressure across the year after taking few key internal initiatives such as increasing private label and exclusive products in core categories which are anticipated to exceed 25% in FY19, increased FOB direct importing, and improved collaboration with supply partners. EBITDA margin stood at 6.1% in FY18 and sets a long-term goal to achieve 10 per cent EBITDA margin with the support of its cost optimization strategy along with the introduction of new brands and expanded service offers to leverage store assets. As of now, the group is focused on driving further gross profit margin expansion with increases in scale, improving sourcing options and managing product mix, as well as leveraging the significant investment that has been made in the Support Office over time.


Gross Profit and Gross Margin Trend (Source: Company Reports)

Strategic Investment in Digital Platform: BBN is focused on excellent retail execution and growing brand awareness to help drive continued sales growth across its existing stores and online platform. Besides this, the customers are increasingly researching products that they are looking to purchase and transacting online. A company’s website is typically the first point of contact for any new customer. Resultantly, it is imperative for a retailer’s website to provide an outstanding customer experience and communicate the core value proposition. For omnichannel retailers, an integration of the company’s website and store network through capabilities such as click & collect are becoming more important for customers. To that matter, the company has commenced significant investment in the website re-platform project with the objective of deploying a new e-commerce platform later this year to provide a step change in BBN’s digital channel to deliver engaging content and experiences for customers at every stage of their journey. During FY18, the total online sales grew 63% and made up 9.5% of total sales. Click and collect rose 66% during the year and was 27% of total online sales. As of now, the key focus is to invest further in digital to deliver the best possible customer experience across all channels. Towards the end of FY18, the new Baby Bunting gift registry mobile app was launched, enabling parents and parents-to-be to create and share gift registries consisting of products selected from Baby Bunting’s range. We expect that this strategic investment in the digital platform will ensure growth path ahead.


Investment in Digital Delivering Growth (Source: Company Reports)

Highly Experienced Team: The company has a highly skilled executive management team with deep retail sector experience. The members of its senior management team have over 20 years of experience in the retail field and possess an in-depth understanding of the specific industry, products and geographic regions they cover, which we believe enables them to support and provide guidance to its employees and grow its business. Currently, the group is headed by Mr. Matt Spencer – current CEO & Managing Director. He has a sound track record to work in retails sector and has proven to be a key contributor to the initial establishment of the Coles Express business. Since December 2007, the Company has cultivated and maintained a strong focus on corporate governance, including the appointment of a Board with diverse backgrounds and significant retail experience.

Financial Performance: The company has a sound track record of delivering decent financial performance and growth. The Company has achieved a five-year compound annual growth (CAGR) in Sales and EBIT of 19.2% and 21.4% respectively to FY18 while PAT recorded CAGR growth of 20.7 per cent over the same period. However, for FY18, the company delivered 29.1% fall in the statutory net profit after tax (NPAT) to $8.7 Mn, and 20.7% fall in the statutory earnings before interest, tax, depreciation, and amortization (EBITDA) to $17.5 Mn against the prior corresponding period. It was mainly impacted by the rise in operating cost in relation to the strategic investment for the future growth and price deflation through market discounting. Pro forma cost of doing business was up by 113 bps to 27.1% of total sales against prior year while overheads cost remained constant and recorded 5.1% of total sales in FY18 against FY17. Based on the performance, the Board of Directors declared a fully franked final dividend of 2.5 cents per share fully franked, bringing the total dividend for FY18 to 5.3 cps, and in line with the current Group dividend payout ratio of 70% -100% of pro forma NPAT. It will be paid on September 14, 2018 with the record date of August 24, 2018. The Company expects FY19 EBITDA to be in the range of $24.0 Mn to $27.0 Mn, representing growth of around 30% to 45% (excluding employee equity incentive expenses).  


Financial Performance (Source: Company Reports)

Outlook & Risk: In our view, the company’s low-cost value retailing approach is a winning business model for Australia. BBN also has an astute competitive strategy and, seems to be rightly positioned to capture the value from long-term opportunities in the Australia retail segment. BBN sees the online baby goods retail model as a very tough one but recognizes that it appeals to a segment of consumers; hence, it is building its own platform to mitigate this long-term risk and to penetrate areas where opening physical stores is prohibitively expensive.

Other Key Updates: The group had recently informed the market that its Non-executive Director, Stephen Roche has resigned from the Group with effect of 24 June 2018. Besides this, BBN stock, as per March 2018 Quarterly Rebalance of the Ordinaries S&P Dow Jones Indices, was removed from S&P/ASX 300 Index, effective from March 19, 2018. However, the stock has now risen over 46% in respective six months till date.

Stock Performance: BBN offers a high-quality discretionary play with strong competitive positioning, proven in-market excellence and impeccable track record of generating long-term shareholder value over multiple periods. While there could be near-term challenges in Australia retail market due to intense competition. To that matter, the company has done synergistic investment into the business to strengthen its online and offline trading platform to mitigate the upcoming risks. On the valuation front, the company has a price-to-earnings ratio of 34.35x, and has posted a return on equity (RoE) ratio of 9.2 per cent, return on capital employed (RoCE) of 8.2 per cent and has a debt-to-equity ratio of 0.11x. Meanwhile, BBN stock has risen 65.45% in the last three months but down 4.05% in the past one week as at August 20, 2018 with director Gary Levin disposing some fully paid ordinary shares and director Donna Player acquiring few. In the last 12 months, this stock has reached a high of $2.560 and a low of $1.250. Given the backdrop of aforesaid facts along with financial performance and its capital position, the stock is expected to be witnessing improved momentum in future. Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $ 2.370.
 

BBN Daily Chart (Source: Thomson Reuters)

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