Baby Bunting Group: Still our all-rounder pick
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 17 February 2020, 1:40 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
- BBN reported a slightly weaker than expected 1H20 result, with a higher than expected GM (+230bp yoy) offset by lower sales (1% LFLs) and opex investment
- The above said, BBN grew its EBITDA by 22% and NPAT by 31% in the half.
- FY20 EBITDA/NPAT guidance was reiterated (+25-36%/30-42% yoy), with a slightly softer LFL sales offset by a GM upgrade. We sit at the mid-upper point of guidance.
- The 1H GM implies >37%% in the final 12 weeks of the half, creating strong momentum into 2H20. 2H20 should also see some modest opex leverage (1H investment easing and providing comps are reasonable – similar to the 1H19/2H19 CODB skew). This should see BBN achieve c40% growth in the 2H.
- The website execution issues which impacted LFL growth in the 1H are undoubtedly disappointing, however nothing in today’s result shifts out LT positive view on the quantum and duration of BBN’s growth profile. BBN remains our all-rounder retail pick with solid top-line growth converting to strong EBITDA/NPAT growth from additional GM upside and an eventual return to opex leverage.
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1H20 result softer than expected
BBN reported a slightly weaker than expected 1H20 result, with a higher than expected GM (+50bp MorgsE) offset by lower sales and opex deleverage (investment/lower comps).
LFL sales growth was +1% (implies last 12 weeks were -1.4%), impacted by cannibalisation (LFLs +4.1% excl. new stores) and lower website sales in the first fourmonths.
Key highlights of the result: revenue+8.1%; EBITDA +21.7%; and NPAT +21.7%. BBN saw an A$11m working capital build in the period, A$5-6m of which was due a planned build ahead of Chinese New Year (earlier this year).
With the coronavirus having the potential to impact supply chains/inventory availability in coming months across the entire industry, this move will likely prove fortuitous for BBN.
… but FY20 guidance reiterated
BBN’s LFL sales growth in the first 6 weeks of 2H20 was +5.7% (cycling +5.9% in the pcp).
The company reiterated its FY20 EBITDA guidance of A$34-37m (+25-36%) underpinned by: low-mid single-digit LFLs (from mid-single digits prev.); 4-5 new stores; and ~37% GM (+200bp; vs +36% prev.).
BBN also reiterated FY20 NPAT guidance of A$20-22m (incl. AASB16) – so underlying NPAT guidance is A$19.5- 21.5m (+30-42%).
We now forecast FY20 EBITDA of A$36.3m and NPAT of A$21m. Our EPS forecasts move by -1%/-2.4%/-1.9% in FY20/21/22, respectively.
BBN does not see a meaningful impact from the Coronavirus and is in a healthy inventory position as it enters the 2H.
Short-term comps aside, we see a long runway of growth
We view BBN’s strategy of rolling out stores/investing in opex at the risk of cannibalising ST LFL sales growth and earnings as the right strategy given the meaningful store rollout potential.
We see continued upside to our med-term forecasts through a number of factors: upgraded store rollout target (plan review to be complete in 4Q20); continued GM upside given multiple factors (P/L, direct importing, supply chain benefits); and eventual return to operating cost leverage.
BBN remains very well placed to deliver strong earnings growth as the only national baby goods retailer domestically.
ADD maintained with a revised price target (login to view). We remain attracted to the significant long-dated growth profile of the business.
Key risks: consumer sentiment; Amazon risk; a falling AUD; failure to secure store sites; and higher-than-expected rates of cannibalisation.
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