The Baby Bunting Group Ltd (ASX:BBN) share price plunged 16% to $1.64 after the company released strong annual results this morning. Here's what you need to know:
- Revenue grew 17% to $278 million
- Pro-forma net profit after tax (NPAT) grew 22% to $13 million
- Pro-forma earnings per share of 10.3 cents
- Total dividends of 7.2 cents per share
- Same store sales growth of 6.9%, forecast for 'mid single digit' growth again in 2018
- $6.4 million cash at bank, $4.8 million total debt
- 43 stores open, expected to open 5-8 new stores in the first half of 2018
So what?
A small baby product retailer and a recent initial public offering (IPO), Baby Bunting posted a strong set of results. Pro-forma results are used as this allows comparison to the prior year, but it is worth noting that $0.8m in employee stock compensation is excluded from the pro-forma figures. Margins and same-store sales grew strongly, and the company has a net cash position which will be important as it plans to expand. However, it seems that investors have increasingly become cautious about the spectre of competition, especially online.
In the accompanying presentation, management addressed concerns that Amazon or online might hurt the company's business model. Their view is that in-store experience is vital to both suppliers and customers, particularly since baby purchases are often quite considered the ability to showcase a product (like a bassinet). Essentially, online may prove an adjunct to the real thing and that bricks and mortar stores are still vital for suppliers.
Is this why shares plunged?
Today's share price fall was possibly due to management's announcement of heavy investment spending, with "…around $4 million capital for infrastructure and capability to deliver growth, plus investment in new stores and refurbishments, and up to $3 million investment in operating expenditure of which $0.5 million is non-recurring;".
$2.5 million in recurring operating expenditure would reflect 10% of this year's profits. Total spending of $7 million is half of this year's profits. Plus, Baby Bunting paid out $11.6 million in dividends (from $13 million in profits). Altogether this suggests either that there will be a cut to dividends or a big increase in debt in the coming year in order to fund this investment.
Now what?
Baby Bunting shares rocketed on listing, hitting a high of $3.06 in October 2016 before slipping back to today's prices of $1.64, where they price the company at approximately 16 times annual earnings. This is not expensive if you take the view that the company could grow rapidly, with a network target of 80 stores in the future. Between 5 and 8 new stores will be opened in financial year 2018.
However, it is important to watch how the company manages its expansion and the risk of competition, which could hurt margins. I'll be watching from the sideline for now.
