Company Overview: Baby Bunting Group Limited is a retailer of baby goods, primarily catering to parents with children from newborn to three years of age and parents-to-be. The Company is engaged in the operation of Baby Bunting retails stores and its online store, www.babybunting.com.au. The Company's product categories include prams, cots and nursery furniture, car safety, toys, babywear, feeding, nappies, manchester and associated accessories. The Company offers over 6,000 products. The Company sells private label and exclusive products. Private label products are sold by the Company under its own brand, 4Baby. The Company operates approximately 40 stores across all Australian states and territories, except Northern Territory and Tasmania. The Company offers additional services to its customers, including lay-by, car seat fitting, parenting rooms, which include baby weight scales, and an in-store/online gift registry.


BBN Details

Decent Performance Amidst Challenging Environment in FY 2018: Baby Bunting Group Limited (ASX: BBN) ended FY 2018 by generating sales of $303.1 million reflecting the growth of 9% on a Y-o-Y basis. The top management of the company reflected positive views for the performance in FY 2018 by stating that Baby Bunting managed to witness favourable momentum with respect to market share. It would not be wrong to say that the company has witnessed robust momentum with regards to the online sales as these sales encountered the growth of 63% in FY 2018 as compared to prior corresponding period or PCP. Of the total sales, the company reported that online sales accounted for 9.5%. In FY 2018, the company generated EBITDA or earnings before interest, tax, depreciation and amortization (pro forma) amounting to $18.6 million which implies the fall of 18.9% as compared to prior corresponding period or PCP. Over the last five years, the company’s topline and bottom line have been at CAGR of 19.2% and 23.7%, respectively. It was mainly driven by its robust business strategy such as maintaining low price policy, offering the widest range of products through its store network and distribution centers, and effective cost marketing strategy. In our view, the company has a brighter outlook on the back of excellent retail execution, increasing brand awareness in the domestic market, new store roll-outs, improving customer experience, and working towards effective market campaigns.


BBN’s Sales-related Figures (Source: Company Reports)

Decent Performance continues in early FY19: The management of the company has provided FY19 trading update at AGM wherein the company has delivered Comparable Store Sales Growth of 9.6% on YTD basis. As per the report of Baby Bunting Group Limited, in the initial twenty weeks, i.e. till November 15, 2018, the company has witnessed a rise in the total sales of 17% as compared to PCP or prior corresponding period. Also, the release stated that the gross margins are witnessing a favorable momentum and happen to be on the pace which is required to achieve the targeted gross margin of above 34% in FY 2019. Further, the company is expecting to roll out two new stores before Christmas. As a result of this, the store network would reach 52 stores.

Growth Strategy of BBN Centered Around Deployments: The management of Baby Bunting Group has maintained it business objective towards enhancing the market share in the domestic region with the help of several measures. The company plans to make deployments towards the digital tools so that the experience of the customers gets improved. In a bid to increase the market share, Baby Bunting would also be initiating the deployments towards the activities which are focused on increasing the revenues with regards to the existing stores. The company’s plans of deployments towards customer experience as well as service and its network of the stores are expected to act as tailwinds.

Also, the robust momentum with respect to the new markets by working towards store network would also help the company in enhancing the market share. Lastly, the company has plans to work for the favorable momentum in the EBITDA margin. The top management of the company had stated that the company happens to be in a robust position and would be able to tackle the changes with respect to the market conditions. In a bid to come up with the stable platform as well as to improve the market share, the company has maintained its focus towards deployments in the supply chain, systems as well as logistics infrastructure.


BBN’s Growth Strategy (Source: Company Reports)

Gross Profit Margin Improved in FY 2018: Baby Bunting Group ended FY 2018 by generating the gross profits of $100.9 million which implies the YoY growth of 5.9%. However, there has been a fall in FY 2018 in the gross profit margin by around 100 bps as compared to the prior corresponding period, and thus, gross profit margin was 33.3%. During FY 2018, there has been a positive momentum as well as gradual improvement in the gross profit margin of the company on the back of favorable momentum which was witnessed in the exclusive products as well as private label. However, there have been developments in the trading terms with regards to the supplier partners which also helped in the gross profit margin improvement. Over the past five years, the company posted gross margin of 33.90% on an average basis (FY14-18). Hence, we presume that gross margin will continue to remain around or above 33% in years to come at the back of strategic investment in new talents within its merchandise teams, offering private label products in strollers, change tables, Manchester, babywear, portacots, plastics, toys, consumables and highchair categories, and focuses on an improvement of procurement efficiencies.


BBN’s Gross Profit and Gross Margin (Source: Company Reports)

Suppliers’ Support Aided Private Label and Exclusive Products in FY 2018: In FY 2018, Baby Bunting Group Limited saw robust growth momentum in the sales related to private label as well as exclusive products. It would be important to note that of the total sales in FY 2018, the contribution from the private label and exclusive products stood at 20.9%. The favourable momentum in the private label and exclusive products sale was witnessed mainly because of the help of important suppliers. As per FY 2018 annual general meeting or AGM presentation, the company stated that the improvement related to the private label program would consist of the introduction of additional lines. The presentation also details the expectations related to FY 2019. In the AGM presentation, the company stated that there are expectations that, out of the total sales, private label, as well as exclusive products, would be accounting for more than 25% in FY 2019 (as shown in the figure). However, in the long-term, the company has been focusing that the sales of private label and exclusive products constitute more than 50%.  
 
 
 
BBN’s Private Label and Exclusive Products (Source: Company Reports)

Robust Opportunity Prevails for Improving Customer Experience: Baby Bunting Group Limited has maintained its focus towards working for improving the customers’ experience. The company stated that there happen to be numerous opportunities. It can be assumed that the increased investments in the customer experience space could support the company moving forward. Thus, the company has been making deployments which are focused on service improvement.

Baby Bunting Group has initiated the deployments towards the digital side as they have deployed hand-held devices as well as fresh in-store communication systems. The company stated that these deployments have the potential to support the operating efficiencies. These efficiencies would be helping the teams as well as the customers of the company.

Ramping Up with Respect to Digital and Online Space: The top management of Baby Bunting Group stated that there has been decent progress when it comes to the digital as well as online space. According to them, the company has been ramping up at a decent pace with respect to the new website replatform. The management of the company is very optimistic about the growth prospects related to the new web platform. They stated that there are expectations that the engagement levels in the new web platform would be elevated.

Also, the management of Baby Bunting Group stated that this would be supportive to the growth prospects of the future. They also stated that online deployments made by the company would support the company in terms of lower bounce rates, higher traffic as well as increased rates of the conversion. Therefore, it could be assumed that the company is expected to encounter significant growth moving forward primarily on the back of the support of the online space as well as digital channels. The company had also made deployments towards the new team members and these team members are carrying out activities related to the digital marketing as well as SEO or search engine optimization so that the conversion can be supported. 

Exit of Competitors Provides Room for Growth to Baby Bunting: The management of Baby Bunting Group stated that the changes with respect to the competition which have been witnessed throughout Australia have provided the company with substantial room for growth related to the market share. In the results presentations for FY 2018, the management of Baby Bunting Group Limited stated that there are expectations that it would be able to generate EBITDA between $24 million and $27 million in FY 2019. This guidance range is excluding the expenses related to the employee equity incentive. However, there have been certain assumptions related to the guidance which have been given. Firstly, the growth with regards to the comparable store sales is anticipated in mid to high single digits in FY 2019. An important component happens to be how much of the share of the market can the company achieve as the competitors have left the market. Secondly, the management is of the view that the gross margins would be more than 34% in FY 2019. Thirdly, the guidance has also been based upon the assumption that FY 2019 would encounter fresh six stores.


Crucial Changes in Markets (Source: Company Reports)

Stock Recommendation: Over the past six months, Baby Bunting Group has delivered a decent return of 45.14% and is trading close to its 52-week higher range with an annual dividend yield of 2.54%. On technical analysis front, two technical indicators have been applied on the daily chart of Baby Bunting Group Limited and the default values have been considered to analyse the expected movement in the stock price. As per the observation involving Exponential Moving Average or EMA, the stock price has crossed the EMA and is moving downwards. As per the Relative Strength Index or RSI, the 14-day RSI has started trending downwards and might reach the oversold region. Once 14-day RSI reaches the oversold region, there are expectations that it would be rebound which would lead to the bullish momentum. In addition, the factors like the deployments towards the digital initiatives as well as towards improving the customer experience and the expectations for the favourable momentum in the market share because of the exit of competitors places the company in the decent position to witness growth moving forward. Hence, we give “Speculative Buy” recommendation on Baby Bunting Group Limited at the current market price of A$2.050 (down 1.914% on December 18, 2018). 
 

BBN Daily Chart (Source: Thomson Reuters)

 
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