Baby Bunting Group: Taking a breather short term
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Former Senior Analyst
- Date posted:
- 16 August 2021, 7:00 AM
- Sectors Covered:
- Consumer Discretionary (Retail)
- BBN delivered another strong period of growth in FY21 – 16% revenue growth converting to 36% EBIT growth.
- Considerable GM expansion compensated for material and ongoing overhead investment, a trend that is expected to continue in FY22/23.
- Mature store level margins now sit at 19% (17% previously), providing upside to BBN’s long-term group EBITDA margin target of 10% (likely now 12% after deducting c7% in overheads).
- EPS forecasts -2% with higher GMs offset by higher opex.
- Trading on 26x FY22F, downgrade to Hold rating (login to view).
FY21 result – 3% NPAT beat
BBN’s FY21 result beat Morgans/consensus forecasts by 2-3% at NPAT with 16% revenue growth (11.3% LFL growth, 4 new stores + annualisation of FY20 stores) converting to 35% PF NPAT growth in the year (+43%/+30% 1H/2H).
Strong 2H GM expansion (+112bp) comfortably offset higher opex (+15% or 10bp).
BBN’s overhead costs increased by A$7m in FY21 (+37%), inflated by the following: 1) A$1.1m of biosecurity costs (fully reverses moving forward); 2) A$1.1m in COVID-related costs (c80% of which reverses moving forward); and 3) A$2m in staff incentive payments (which will likely continue should BBN continue to report earnings growth). Higher 3PL costs also inflated COGS by >A$1m.
Balance sheet: BBN exited FY21 in a A$1m net cash position, despite a material working capital build off the COVID impacted pcp. Further inventory investment is likely over the balance of CY21 which speaks to the company’s confidence in demand in the wake of lockdowns. The final dividend was +30%, in line with NPAT.
We are relaxed with the trading update, but more investment coming
LFLs in first 7 weeks of 1H22: -6.4%, impacted by current rolling lockdowns. However, excluding NSW, LFL sales growth is +1%. Importantly, LFL sales growth peaked at -12% in week 4, implying the last 3 weeks have seen a return to positive LFL sales growth (even including NSW) – we estimate c2%.
BBN laid out further one-off costs relating to additional transformation projects – FY22: A$5m opex and A$4m capex; and FY23 A$2m opex and A$6m capex. The A$7m of additional ‘one-off’ opex represents c5% of annualised opex.
Other outlook comments to note: 1) as we have been tracking, BBN referred to the strength in medicare scan data (<12 weeks) which will likely set up for 6 months of strong demand ahead; 2) expecting to rollout new stores at the top-end of its historical range (ie 8 in FY22); and 3) mature stores (>4 years of age) are delivering store level EBITDA margins of 19% (vs 17% prev.), lending upside to its LT group margin target of 10% (after overheads which are currently running at c7% of sales).
Forecast and valuation update
We have lowered our FY22/FY23 EPS forecasts by a modest 2% with revenue unchanged and higher opex assumptions partially offset by higher GMs.
In FY22 we forecast 10.9% revenue growth (8 new stores + 3% LFL sales growth), GM +70bp, CODB % of sales +30bp (further opex deleverage), leading to 11.1% EBITDA growth. A normalised tax rate/higher D&A, sees NPAT growth of 8%.
Higher capex forecasts and modestly lower EPS forecasts see our DCF/PE valuation fall to (login to view). Trading on 26x FY22F and within 10% of our valuation, we lower our rating to Hold.
BBN has shown its ability to grow market share and earnings well in excess of peers. Industry data clearly points to a solid birth-date backdrop over the next 6- months.
BBN is now trading on 26x FY22F and is within 10% of our new PT. We therefore lower our rating to Hold, but note BBN remains very well positioned to further grow market share and compound growth for investors.
Key risks: COVID-19; softening consumer sentiment/spending; Amazon risk; a falling AUD; failure to secure new store sites; higher-than-expected rates of cannibalisation; and heightened competition/discounting.
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.