Baby Bunting (ASX:BBN)

Matt Spencer
CEO
Market Cap (AUD): 294.61M
Sector: Consumer Discretionary
Last Trade (AUD): 2.33 +0 (+0%)
Tab Bar

1. About

Baby Bunting is Australia’s largest nursery retailer and one-stop-baby shop. A specialist retailer catering to parents with children from newborn to 3 years of age. With over 6,000 lines, the company provides parents with the greatest range in prams, car seats, carriers, furniture, nursery, safety, babywear, manchester, changing, toys, feeding, and much more. The company offers a choice across all the big brands including bugaboo, silver cross, steelcraft, britax safe n sound, maxi cosi, infasecure, ergobaby, boori, oricom, medela, bonds, huggies, bright starts and more. Baby Bunting now employs more than 700 people across its 37 national superstores and 11,000sqm warehouse in Melbourne. The company also offers a variety of services including gift registry, click & collect, accredited car seat fittings and lay-by.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue ($’000)

% of Total Revenue

% of operating EBIT

Profit drivers[2]

Australia

$278,027

100%

100%

Sales growth was achieved through:

  • 6.9% comparable store sales growth in both the Company’s store network and in its online store – this is in line with the Company’s long term historical average;
  • The annualising benefit of five stores opened in FY2016, trading for a full financial year in FY2017; and
  • Growth from the opening of six new stores during FY2017.
 

3. Strategy

 

Key strategies include:[3]

 

The company growth strategy remains unchanged from previous years.

 

The key elements are to:

  • continue with new store roll-out, which has seen six new stores opened in FY2017;
  • achieve growth from existing stores and online. During FY 2017, sales grew both across the store network as well as online;
  • improve EBITDA margin, through a mix of gross margin improvement and cost of doing business leverage. Baby Bunting’s pro forma EBITDA margin increased from 7.9% in FY2016 to 8.3%.

 

In addition, the Company intends making further investments during the year in technology, digital and supply chain initiatives, among other things, to ensure that it is well positioned to continue its growth and to better serve its customers as the Australian retail environment changes and evolves.

The company expects to open between five and eight new stores during the year. In addition to Munno Para, South Australia (which opened in July 2017), two additional stores are expected to open in the first half of FY 2018.

4. Markets

 

To arrive at Baby Bunting's addressable market, the Company discounts the food, apparel and nappies categories which are a smaller component of its broad product offering:[4]

Category Baby Goods market in Australia Baby Bunting's Addressable Market
Food, Nappies, Clothing $3B $0.3B
Prams, bassinets, dummies, bottles $0.7B $0.7B
Cots, mattresses and nursery furniture $0.6B $0.6B
Toys $0.3B $0.3B
Car seats $0.3B $0.3B
Other $0.2B $0.2B

 

5. Competition

 

Major competitors include:

  • Baby's R Us

6. History

 

2015[5]  

Baby Bunting Group Limited listed on ASX

 

2016  

Sale of shares by TDM Asset management

 

2017 

Opened six new stores being Preston in Melbourne, Camperdown, Belrose and Blacktown in Sydney (the largest market), Baldivis, South of Perth and Mile End in Adelaide

 

2018  

Baby Bunting’s market position strengthens as sector consolidation continues 

7. Team

 

Board of Directors[6]

           

Ian Cornell – Non-Executive Chairman           

Matt Spencer – CEO & Managing Director                       

Gary Levin – Non-Executive Director

Melanie Wilson – Non-Executive Director

Donna Player – Non-Executive Director

Stephen Roche – Non-Executive Director


read more

8. Financials

 

Financial Year 2016/17 (ended 30 June):[7]

 

Divisions

Revenue ($’000)

% Change

Profit (before Int, Tax) ($’000)

% Change

Australia

$278,027

17.4%

18,944

20.1%

Total

$278,027

17.4%

18,944

20.1%

9. Risk

 

Key risks and uncertainties[8]

 

Competitive risks

The Company faces competition from specialty retailers as well as department stores, discount department stores and online only retailers. International online retailers and marketplaces operating in Australia are also sources of current and future competition. Competition is based on a variety of factors including price, merchandise range, advertising, store location, store presentation, product presentation, new store roll-out and customer service. The Company seeks to address competitive risks by focusing on providing customers with low prices every day. In addition, the Company is focused on providing an excellent customer experience – regardless of whether the customer is visiting a Baby Bunting physical store or the online store. Elements of this experience include quality advice, high service levels and a very wide product range.

 

External economic risks

Although the purchase of baby goods may be considered less discretionary compared with other consumer goods categories, Baby Bunting’s performance is sensitive to the current state of, and future changes in, the retail environment and general economic conditions in Australia. A deterioration in the retail environment may cause consumers to reduce their level of consumption of discretionary items.

 

Property and operational risks

The company’s new store roll-out strategy depends upon securing properties that meet the company’s rigorous selection criteria, at financially viable rents. A failure to secure appropriate sites could impact the company’s financial performance and position. As the company’s stores are leased the ability to continue in a store is subject to negotiation at the end of each lease term. The company actively manages its property portfolio to ensure appropriate sites continue to be available for its stores.

The company’s supply chain is important to ensuring that products are available in-store and online for customers. The key risks associated with Baby Bunting’s supply chain include operational disruption due to catastrophic events such as fire or flood, delays in product delivery or complete failure to receive products ordered. Poor supply chain management could adversely affect the company’s financial performance and customers’ experience of shopping with Baby Bunting. The company continues to focus on logistics initiatives to ensure that this risk is managed appropriately.

An element of the company’s strategy involves growing its private label and exclusive product offerings. The ability of the Company to continue to offer exclusive products depends upon the relationships it has with suppliers. Any deterioration of those relationships could adversely impact the company’s ability to supply exclusive products or, more generally, to successfully provide customers with a wide range of products at competitive prices. The company continues to invest in its merchandising team to continue to ensure that it is appropriately managing relationships with its suppliers.

 

Product compliance risks

Many of the products sold in Baby Bunting’s stores or online must comply with Australian mandatory product safety standards. In addition, products Baby Bunting sells must comply with general product safety requirements under Australian law and also meet the expectations of our consumers. Failure to do so may adversely affect the Company’s reputation and performance and result in significant financial penalties. The company has procedures to assess compliance issues of the products that it supplies, as well as procedures to respond to and investigate reports of product safety incidents that it receives.

 

Workplace and people management risks

Workplace health and safety is a priority at Baby Bunting. Failure to manage health and safety risks could have a negative effect on the company’s reputation and performance. The company has a safety management system, which includes a Health, safety and injury management policy, with the aim of identifying and assessing workplace health and safety risks as well as educating employees in stores, at the support office and at the distribution centre about safe ways of working. The company’s future performance depends to a significant degree on its key personnel, and its ability to attract and retain experienced and high performing personnel. The company’s remuneration policies and practices seek to ensure that executives and managers are provided with appropriate incentives and rewards to support their retention. In addition, the company continues to make investments in training and development to further expand the skills of the company’s employees.

 

Cyber and technology risks

In common with other e-commerce retailers, the company faces a range of cyber risks. This is a broad concept and encompasses a variety of risks that use or impact computer systems and that can result in authorised access or disclosure of information held by the company, the commission of frauds or thefts, or the disruption of normal business operations.

The company relies on its IT systems, retail point of sale and inventory management systems, networks and backup systems, and those of its external service providers, such as communication carriers and data providers, to process transactions (including online transactions), manage inventory, report financial results and manage its business. A malfunction of IT systems or a cyber security violation, could adversely impact Baby Bunting’s ability to trade and to meet the needs of its customers.

 

Market risks

Foreign exchange risk management

The majority of the consolidated entity’s operations are transacted in the functional currency of the country of operation and are therefore not significantly exposed to foreign currency risk. Less than 10% of goods sourced by the consolidated entity are purchased directly in a foreign currency. However, the consolidated entity’s Australian-based suppliers have exposure to foreign currency, most notably the USD, providing the consolidated entity with a secondary currency exposure.

A decrease in the exchange rate of AUD relative to the USD could result in increased costs of goods imported. Consequently, the consolidated entity is exposed to movements in the AUD/USD exchange rate should suppliers pass through to the consolidated entity movements in cost of goods attributed to foreign exchange.

 

Cash flow and fair value interest rate risk

The consolidated entity is exposed to interest rate risk as it borrows funds at floating interest rates. Any increase in interest rates will impact the consolidated entity’s costs of servicing these borrowings, which may adversely impact its financial position.

 

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, who assess the consolidated entity’s short, medium and long term funding and liquidity management requirements. The consolidated entity manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows.

 

Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has endeavoured to minimise its credit risk by dealing with creditworthy counterparties and use of counterparty account based credit limits which are regularly reviewed against historical spending patterns for appropriateness.

The consolidated entity does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any allowance for impairment, represents the consolidated entity’s maximum exposure to credit risk.

 

Fair value of financial instruments

The carrying amount of financial assets and financial liabilities recorded in the financial statements approximate their fair values.