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 New Store Roll-Out- Support Topline Growth: Baby Bunting Group Limited (ASX: BBN) currently operates 48 stores across Australia, having grown organically since it was established in 1979. The Company has a proven track record in opening successful stores owing to a rigorous and methodical approach to new store site selection. The Company believes it can achieve the opening of four to eight new stores a year. The Company is targeting 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. Following the announced closure of Toys R Us / Babies R Us, Baby Bunting is reviewing potential store opportunities that may become available in catchments identified in Baby Bunting’s existing network plan. Furthermore, the group has recorded a number of store growth at CAGR of 20.2 percent over the ten years and targeted to open more than 80 stores. We expect that the accelerated pace of store additions and growth in e-commerce business will support revenue growth in the upcoming years.


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

EBITDA Margin Improvement: The group has recorded gross profit growth at CAGR of 22.0 percent over the five years. Resultantly, the gross margin came in at 33.9% on a 5-year average basis (FY14-18) and expect to recover more than 34% in FY19. However, Gross margin (GM) has decreased by 100 bps as BBN sells at discount prices compared to peers. EBITDA margin was also down by 213 bps to 6.1% on YoY basis due to the rise of 113 bps in the cost of doing business. As a % of sales, store expenses have increased to 21.4% from 20.4% and administrative expenses to 4.3% from 4.2% on a YoY basis. Moreover, 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. This includes investment in new Support Office roles, supply chain strategy planning ($0.2 Mn one-off cost) and annualization of FY17 roles and IT licensing costs. The company expects that gross profit margin recovery has come about due to improved trading terms with supplier partners and an increased proportion of private label and exclusive products. Going forward, we assume an improvement in GM is very limited due to BBN’s conscious effort to sell its products at discount prices compared to peers on an everyday basis. We assume GM to be in the range of 33% -34% for the long-term.


Gross Margin Outlook Looks Decent (Source: Company Reports)

Growth from Existing Stores and Online – driver of overall growth momentum: The group is focused on excellent retail execution and growing brand awareness to help drive continued sales growth across its existing stores and online. For that matter, the company has implied strategy to increase Comparable Store Sales Growth that includes growing brand awareness, particularly in under-penetrated regions; ongoing improvements in product ranging; further investment in customer programs and in-store technology; ongoing investment in website and expanding online capabilities such as click & collect and live chat; remodelling the Baby Bunting loyalty program; leveraging customer analytics to drive targeted digital marketing enabled by an investment in improved Customer Relationship Management (CRM) functionality; continuing to improve the in-stock position; and ongoing investment in training and store support. On CAGR basis, the company posted Comparable Store Sales Growth of 19.0 percent over 4 years (i.e., FY15-18) while online sales recorded CAGR growth of 69.8 percent over the same period. In FY2018, the Company delivered flatted growth (negative 0.2%) of Comparable Store Sales 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. We believe that the new stores will deliver a healthy Comparable Store Sales Growth, whereas matured stores grow closer to the inflation rate. Going forward, as the number of matured store increases, we anticipate Comparable Store Sales Growth (SSG) to further moderate to a certain extent.


Growth from Existing Stores and Online (Source: Company Reports)

BBN caters to addressable market of $2.4 Bn: Baby Bunting is the largest specialty retailer in the Australian baby goods market and has a successful track record of organic store roll-out, with a focus on locating stores in areas exhibiting favourable demographic and competitive characteristics. During the year, BBN estimates the Australian baby goods market, including apparel, food, and consumables, has current annual sales of approximately $5.1 billion per annum. Precisely, the Company estimates for the current addressable market to be around $2.4 billion per annum (or approximately 41.2% of the total Australian baby goods market). This addressable market estimate was determined by cross-referencing Baby Bunting’s major product categories to the Australian Bureau of Statistics Household Expenditure Survey data taking into account population data. To arrive at Baby Bunting’s addressable market we discount the food, apparel and nappies categories which are a smaller component of its broad product offering. The demand for baby goods is influenced by a number of factors such as the total number of births and population, general economic conditions like Gross Domestic Product (GDP) growth, the level of unemployment, household wealth, inflation and interest rates, etc. The Company considers that baby goods purchases are typically less discretionary in nature than other retail categories. We believe a presence in fast-growing and number of store growth offers enough opportunity for BBN to boost sales in the coming years. 


Large Addressable Baby Goods Market (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)
 
Strong FY 18 Financial & Operational 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. 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).  


FY18 – Consolidated P&L Statement (Source: Company Reports)

Capital Management: The company has recently issued 200,000 Share Rights to its existing shareholders which is subject to the terms and conditions of the Long-Term Incentive Plan, as described in the 2018 Remuneration Report. Additionally, half of the Share Rights will be subject to the absolute EPS growth performance condition and the other half will be subject to the absolute total shareholder return (TSR) growth performance condition. Besides this, BBN has declared a fully franked final dividend of 2.5 cents per share. The dividend was payable on September 14, 2018, to shareholders of record on August 24, 2018. This summarized a total dividend payment of 5.3 cents per share for the full year, and in line with the current Group dividend payout ratio of 70% -100% of pro forma NPAT.

Stock Performance and Outlook: We are optimistic on the business fundamentals of Baby Bunting Group Limited, given its; 1) Consistent track record of profitable growth with significant opportunity to scale up; 2) Differentiated business strategy (i.e., low-cost business model); and 3) Strong balance sheet, low working capital needs and sustainable RoE of 9%+. Beside this, BBN confirmed FY19 comparable store sales growth to be mid to high single digits for the year. Moreover, the Company expects FY19 EBITDA to be in the range of $24.0 million to $27.0 million, representing growth of around 30% to 45%. This excludes employee equity incentive expenses. From the analysis standpoints, the company has a price-to-earnings ratio of 34.06x 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 and inventory turnover ratio of 3.9x which is broadly in-line with the industry median of 3.6x. On the stock performance front, the share price has risen 71.53% in the past six months (as at September 17, 2018) and traded close to the 52-week high of $2.560. However, we believe that BBN exhibits higher growth prospects and returns versus peers. Based on aforesaid facts and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.340 (down by 0.426 percent on September 18, 2018).
 

BBN Daily Chart (Source: Thomson Reuters)

 
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