Why the Baby Bunting Group Ltd share price jumped today

Credit: Matt Biddulph

The share price of specialist baby retail business Baby Bunting Group Ltd (ASX: BBN) has risen 2.5% today to $2.45 per share following reports that a Sydney-based competitor had gone into administration.

According to The Sydney Morning Herald, administrator Cor Cordis has been appointed to Baby Zone (Aust) and BHLS Services with administrator Robert Kite citing declining turnover and huge debt. Both business lines trade as My Baby Warehouse which is a major baby product retailer, operating out of 11 retail stores in Sydney as well as an online store.

Notably however, the administration does not involve My Baby Warehouse’s stores in Queensland, Canberra or Perth, according to the SMH, as they are operated by separate legal entities.

What this means for Baby Bunting

Baby Bunting listed its shares on the ASX in October this year and it has performed strongly in the time since. Indeed, there is something of a ‘baby boom’ right now and investors are clearly excited by the sector’s growth potential.

According to Baby Bunting’s prospectus, My Baby Warehouse was one of the company’s biggest rivals. In that sense, the demise of a large portion of their stores is good for Baby Bunting.

In saying that however, there have been a number of collapses within the baby retail market, including Babyco and Mothercare. While some investors would likely argue that Baby Bunting’s dominance was the cause of their demise (the company has grown sales and earnings at very impressive rates), it’s important to be mindful of the risks before paying too much for the group’s shares.

Baby Bunting’s shares are currently trading on a multiple of nearly 33x forecast earnings for this financial year. Although there are strong tailwinds that could drive earnings growth for years to come, the shares certainly don’t look cheap today and investors should conduct their own due diligence prior to making any investment decision.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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