Baby Bunting is a well-recognised baby goods retailer with approximately 12% market share in Australia. The company has 42 stores across its network and has successfully doubled sales in less than 4 years. Baby Bunting is still in the early stages of its store rollout program, with new stores maturing over a 4-year period during which margins effectively double. Together with investment in private label and exclusive products, management expect margins to increase from current levels of ~8% to ~10% over time.

Baby Bunting is somewhat protected from the arrival of Amazon due to mandatory safety standards on the vast majority of its products. This means that Amazon will not be able to sell cheap imports online and will be forced to negotiate with the same domestic suppliers as Baby Bunting. Even so, management has been investing in their online offering and price, positioning themselves as a price leader in a number of categories in order to attract expectant parents at the beginning of their retail journey.

Baby Bunting has had a soft start to the year which has been viewed harshly by the market, despite guiding to 10%-17% earnings growth. We took this opportunity to add to our position in the fund. Just last week Baby Bubs, a large competitor, closed 8 stores after going into administration. This is an ongoing trend, with a number of smaller independents as well as a large chain being forced to shut down over the past year as they have struggled to compete. Experience shows that this should support stronger LFL sales momentum for Baby Bunting down the track.