Could Baby Bunting be the Adairs of FY19?

Robert Frost

OC Funds Management

Baby Bunting (BBN) released an upbeat FY 2018 result earlier this morning, which was a welcome relief to investors who had endured a difficult year following unprecedented structural change in the baby goods industry, with many of the company’s key competitors entering administration. This led to a wave of heavy discounting and stock liquidations manifesting itself in margin pressure and lost sales to BBN’s which weighed heavily on operating results throughout much of the year.

The well-constructed investor presentation released before market was flush with bullish indications for BBN particularly with regards to its competitive position versus both Amazon, as well as its greatly diminished brick and mortar competitors.

With regards to Amazon, 79% (or 197 products) of BBN’s top 250 selling SKUs are not available on Amazon.  Amongst the 21% (or 53 products) sold on Amazon, BBN is in-fact cheaper for the majority (or 36) of products whereas Amazon is cheaper for just the 17 remaining products. Consequently, amongst BBN’s top 250 SKU’s, Amazon offers consumers a cheaper alternative for just 6.8% of these products which are, on average, 7% cheaper which is hardly the game changing disruptor many commentators or analysts would have you believe. 

Moreover, an estimated $138m of sales have left the industry through store closures over the past 12 months by the likes of Bubs, Baby Bounce in WA, NSW and QLD and Toys R US/Babies R US, representing approximately 45% of BBN’s current sales. Clearly this provides a material opportunity for BBN to grow its sales given that it is the only remaining national baby good retailer. 

Management reiterated their medium-term goal of delivering a 10% EBITDA margin (versus FY18 6.1%) which has been heavily discounted by the market and outlined key initiatives to help achieve that target.  The new financial year has started strongly with comparative stores sales growth up an impressive 9.8% as at 5 August. Whilst this is a small sample size, it is particularly pleasing given that Toys R US/Babies R US were in the final stages of their stock liquidation for much for at period.  Managements earnings guidance of $24-27m EBITDA for FY19 represents a 6-19% upgrade to Bloomberg Consensus and should be well received by the market when the stock commences trading this morning.

Robert Frost
Head of Investments
OC Funds Management

Robert was appointed Head of Investments in 2009 and has been a Portfolio Manager since joining OC Funds Management in 2001. Robert is also an Executive Director of parent company, Copia Investment Partners.

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