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Is the Baby Bunting Group Ltd share price a buy for its 7.5% yield?

Baby Bunting Group Ltd (ASX: BBN) is Australia’s largest chain of one-stop shops for baby supplies.

Australia is going through a bit of a baby boom at the moment, so you would think the largest baby product business would be having an easy run.

However, that’s not the case according to the company’s announcement to the market this morning.

Baby Bunting said that two of its smaller competitors had entered into external administration. They were the third and joint fourth largest competitors to Baby Bunting. It has previously announced this news to the market.

Consequently, Baby Bunting’s sales and gross margin have been negatively affected by the liquidation of stock of those competitors.

The company said that comparable store sales growth was 4.7% in the third quarter of FY18, but the first six weeks of the last quarter of FY18 has shown a decline of 2.5%.

Baby Bunting is now expecting that earnings before interest, tax, depreciation and amortisation (EBITDA), excluding employee equity incentive expenses, will be in the range of $18 million to $20 million. At the half-year result a few months ago the company was guiding that EBITDA would be around $23 million. This is a drop of expected EBITDA of around 15% to 20%, which is quite a large decline in just a few months.

The baby product leader did point out that year to date total sales have grown by 9.6%, with transactional growth of 13.1%. Same store sales are flat compared to last year.

The CEO and Managing Director, Matt Spencer said “What we have seen in the industry during this financial year in terms of the extent of consolidation is unprecedented. While challenging in the short term, these changes in market conditions present some great opportunities for the growth of Baby Bunting’s business and profitability in FY19 and beyond.”

Foolish takeaway

I’m inclined to agree with the CEO that competitors disappearing will be a good thing for Baby Bunting in the long run. Less competition should mean more sales and bigger margins in the future.

However, I’m also aware of the big possibility that online retailers like Amazon could seriously damage Baby Bunting. Bricks and mortar retailers have a distinct cost disadvantage against online retailer with how high rent is in key shopping areas.

Baby Bunting may have an attractive trailing dividend yield of 7.5%, but I wouldn’t buy it just for that. The dividend could decline if EBITDA is going backwards, so I wouldn’t buy shares at today’s price – even if the share price drops a fair bit today.

Instead, I want good dividend growth and profit growth for my shares, that’s why I’d much rather have this top stock in my portfolio.

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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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