Why Baby Bunting Group Ltd’s shares surged higher today

Credit: Steve Jurvetson

This morning the shares of Baby Bunting Group Ltd (ASX: BBN) opened over 5% higher at $2.89 following the release of its annual general meeting presentation.

Investors have clearly been impressed with its performance thus far in FY 2017. The presentation revealed Australia’s largest baby products retailer has seen comparable store sales increase by 10% for the first four and a half months of FY 2017.

By comparison Myer Holdings Ltd (ASX: MYR) recently reported growth of 1.6%, and RCG Corporation Ltd (ASX: RCG) and Premier Investments Limited (ASX: PMV) each grew same store sales at 3.5% in FY 2016.

Baby Bunting’s performance is all the more impressive when you take into account the strong comparable store sales growth last year which it was up against. For the first half of FY 2016 Baby Bunting reported comparable store sales growth of 9.2%.

Moving forward though management does expect comparable store sales growth to moderate and be in line with the historic average of mid-single digit growth.

The strong performance of its stores, together with the addition of four new store openings, led to sales growth of 20.3% at 13 November 2016. With up to four more stores due to open before the end of its fiscal year, the company looks well positioned for another impressive full year result.

But despite the strong start to the year, management has only reaffirmed its full year EBITDA guidance of between $21.5 million and $24.5 million. This equates to year-on-year growth of between 15% and 31%.

With its shares changing hands at 39x full year earnings, I believe the company will need to at least hit the high end of its guidance range to justify the premium.

Thankfully I expect the company will deliver on this and therefore feel it is a great investment option for investors looking for exposure to Australia’s retail sector.

With 39 stores operating and management intending to expand to 80 stores, I believe there is still a large runway for growth within the Australian market. After which the company may have to look overseas for growth.

Some investors may want to avoid retail shares due to speculation that Amazon is about to enter the Australian market. If you're one of them then these growth shares might be better for your portfolio in my opinion.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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