Founded in 1979, Baby Bunting Group Ltd (ASX: BBN) has grown up to become Australia's largest specialty retailer of baby goods such as toys, cots and prams as well as nappies and food.
Driving its growth has been the rise in the general population and the number of births (which is expected to continue growing steadily over the next decade), as well as solid economic conditions and rising household disposable income.
It has also quickly expanded its store count (now at 35 stores across Australia, compared to a prospectus forecast of 36 stores by June 2016) and grew sales at a compounded annual growth rate of 24% between financial year 2009 (FY09) and FY15.
Nonetheless, the baby retailer listed its shares on the ASX in October 2015 at an offer price of $1.40, and has since shot more than 85% higher to $2.60. Its shares have risen 4% today alone.
Half-year results
Baby Bunting continued its impressive run during the six-month period ended 27 December 2015, reporting another strong lift in revenue and an even greater lift in earnings.
Firstly, it should be noted that the company opened four new stores during the half-year, taking the total store count to 35. This would have contributed to the group's $108.2 million in sales – up 30.3% on the prior corresponding period – although comparable store sales (that is, excluding the impact from new stores) also rose a very impressive 9.2%.
Its gross margins continued to grow as well, up 48 basis points from the prior corresponding period to 34.8%. This was bolstered by a strong focus on product sourcing as well as an increase in private label and exclusive products which accounted for 9.5% of total sales, up from 2.3% in FY15.
Here are some of the other highlights:
- Pro forma EBITDA (earnings before interest, tax, depreciation and amortisation) up 50.7% to $7.8 million
- EBITDA margin up 1% to 7.2% of sales
- Pro forma NPAT (net profit after tax) up 54.7% to $4.3 million
The fact that its net profit is growing at a quicker rate than its revenue is very pleasing, and the company could continue that trend by growing its online sales and improving its bargaining power with suppliers. This could come through scalability, which would occur as its store network expands and particularly if other rivals leave the industry.
For the record, Baby Bunting noted a 35% increase in website visits during the period, while visits grew by 44% during the month of December year-on-year. Online sales themselves grew by 48%, which may have been boosted by the website's new look and user-friendly nature.
Outlook
Pleasingly, the group's management team said that strong trading has continued into the second half. Year-to-date comparable store sales growth has increased to 11.2% as at 31 January – well ahead of the average 4.8% comparable store sales growth for the six years to 28 June 2015 (according to the prospectus) – although it said to expect moderation in that growth during the second half.
Meanwhile, total sales are now expected to be in the range of $225 million to $235 million, compared to the $218.6 million the company guided for in its prospectus. Pro forma EBITDA is also expected to be between $16.5 million and $18.5 million (ahead of the $16.3 million guided for) with another one or two new stores to be added before July.
Foolish takeaway
Baby Bunting's initial public offering (IPO) was well received by investors in October, which may have been helped by the strong support for shares of Bellamy's Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (Australia) (ASX: A2M) (which both produce infant formula) at the time. However, it certainly seems to have supported that interest based on its results thus far.
Of course, it isn't a risk-free investment. Such strong operating results could be expected to attract new competitors which could impact their ability to continue growing as fast as they have been, while the retail environment could also take a hit if the economy worsens. Parents will continue to buy things for their babies and toddlers, no matter what happens to the economy (a baby's gotta eat!) but extra spending on clothes or toys could be reduced.
Based on the company's forecast pro forma NPAT of $9.1 million, the group's shares are currently trading on a price-earnings ratio of almost 36x earnings, which is by no means cheap. However, if it can continue to grow at the pace it is currently it could still be worthy of a closer look for long-term investors.
