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Is Baby Bunting Group Ltd’s revenue about to boom with competitors going bust?

The Baby Bunting Group Ltd (ASX: BBN) share price is down by 0.63% even though the company released a promising update today.

In the update the baby-product retailer said that two of its competitors, called Baby Bounce and Baby Savings, have recently entered into administration. Baby Bounce operated 10 stores across New South Wales and Queensland, whilst Baby Savings operated four stores in Sydney.

Management said that although the effect of Baby Bounce and Baby Savings going into administration is currently unknown, in the short-term it could lead to negative effects for Baby Bunting’s sales and gross margin.

Baby Bunting had previously guided for earnings before interest, tax, depreciation and amortisation (EBITDA) of around $23 million for FY18. However, if the administrations lead to price pressure then the profit in FY18 could be less according to the ASX release.

Management re-iterated that Baby Bunting remains the clear market leader in the sector and is growing its market share with store roll-outs and improvements in economies of scale.

Baby Bunting said that in the third quarter of FY18 comparable sales store growth was 4.7% and total sales have grown by 13.7%. However, gross margins have come under pressure from increased discounting.

Baby Bunting’s CEO, Matt Spencer, said “These changes may have an effect on our financial performance in the short-term. However, with our low cost of doing business, strong balance sheet, established multi-channel strategy and great team, Baby Bunting is very well placed to capitalise on these market changes now and in FY19 and beyond.”

Foolish takeaway

Baby Bunting could benefit in the long run from competitors going bust. However, it’s not good news that in the short run its margins could come under and pressure and in the long run Amazon could hurt margins even more. I’d avoid Baby Bunting shares at the current price.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.

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