Baby Bunting picks its way through severe industry consolidation in baby goods market

Baby Bunting Group ASX BBN shares financial year
Baby Bunting Group expects its gross profit margin to recover +34% in FY19.

Baby goods maker Baby Bunting Group (ASX: BBN) has unveiled resilient company performance despite “challenging market conditions”, the collapse of four of its biggest competitors and heavy discounting that have slashed industry margins over the past year by as much as 33%.

Now remaining as the largest speciality baby goods retailer in Australia, Baby Bunting’s shares reflected the company’s performance and forward outlook by rising 28% up to $2.23 per share, in early trade this morning.

Baby Bunting today reported A$8.69 million in net profit after tax for the past financial year, a fall of 29%. Its revenue in the past 12 months rose 9% to A$303.1 million, with online sales growing by 63% and total transactions growing 12.5%.

Gross profit increased 5.9% to A$100.1 million.

However, Baby Bunting’s pro forma EBITDA was down 19% at A$18.6 million and net profit after tax for the past financial year was down 29% to A$8.69 million.

Good financial year

Baby Bunting opened five new stores during the past financial year, with a further store opening in July 2018 in Toowoomba, Queensland – bringing the total number of stores to 48. The company said that it expects to open three more stores in the coming 6 months and two more next year.

Online sales have proved to be an excellent source of positive sales growth which has led Baby Bunting to invest more of its efforts towards e-commerce.

“A key focus is to invest further in digital to deliver the best possible customer experience across all channels,” according to the company.

Earlier this year Baby Bunting launched its new gift registry mobile app, enabling parents and parents-to-be to create and share gift registries consisting of products selected from Baby Bunting’s range.

The initiative demonstrates significant investment which Baby Bunting says has commenced in the “website re-platform project” with the objective of deploying a new e-commerce platform to provide a “step change” in Baby Bunting’s digital marketability.

According to market analysts, an estimated A$138 million of sales have left the industry through store closures over the past 12 months with the likes of Bubs, Baby Bounce and Toys R US all leaving the industry.

This amounts to around 45% of Baby Bunting’s current sales thereby serving up a tangible opportunity for the emergent baby goods retailer to grow its sales, given that it is the only remaining national baby good retailer in Australia.

Chief executive and managing director Matt Spencer said the closures of the competitors created “challenging market conditions” and led to “significant price deflation”, with margins dropping by as much as 33% in the past year.

“The past financial year has seen Baby Bunting strengthen and consolidate its market-leading position as the largest speciality baby goods retailer in Australia. In unprecedented times, Baby Bunting’s top 4 specialty baby goods competitors all entered external administration resulting in significant price deflation as a result of distressed retailing,” said Mr Spencer.

Baby Bunting’s four largest specialty baby goods competitors entered external administration during the year and have either ceased trading or are “expected to do so shortly,” according to Baby Bunting.

Market conditions weighed on Baby Bunting’s sales and gross margin performance, with distressed retailers lowering retail prices to generate sales in an attempt to clear inventory.

Wider market news

In possibly worrying news for the broader Australian economy, Baby Bunting said that the structural changes in the baby goods industry over the past year had also resulted in full-year price deflation of 3.6%, for the industry as a whole.

“Despite this, Baby Bunting was still able to grow sales and transaction volumes within the difficult trading environment”, said Mr Spencer.

“The focus for the year ahead is to grow our business by continuing to deliver to our customers the broadest range, at the best value, conveniently across multiple channels while providing excellent service and advice,” he added.

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