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Why this small cap share rocketed 38% higher today

One of the biggest movers in morning trade has been the Baby Bunting Group Ltd (ASX: BBN) share price.

At one stage the baby products retailer’s shares were up as much as 38.5% to a 52-week high of $2.41.

Its shares have since given back some of these gains but still sit 26% higher at $2.20 at the time of writing.

Why are Baby Bunting’s shares rocketing higher?

This morning the retailer released its full-year results for the 12 months ended June 30.

The market was expecting a weak result due to the negative impact of clearance sales from closing competitors, so all eyes were on how the company had started FY 2019 and its guidance for the year ahead.

Firstly, a quick look at FY 2018. Total sales came in at $303.1 million, up 9% on the prior corresponding period. This was driven by store expansion, though, with comparable store sales flat for the year.

Despite the increase in sales, profits were down sharply as the company competed on price with the aforementioned clearance activities.

This led to an 18.9% decline in pro forma EBITDA to $18.6 million and a 29.1% decline in pro forma net profit after tax to $9.6 million.

The significant decline in profits meant the inevitable dividend cut occurred. The board declared a final dividend of 2.5 cents per share, bringing its full-year dividend to 5.3 cents per share. This was down from 7.2 cents per share in FY 2017.

The good news is that I suspect that this could be given a big lift in FY 2019 based on its stellar start to the year.

Management has advised that for the first six weeks of FY 2019 total sales growth was up 16.5% and comparable store sales growth was 9.8%.

In light of this strong start and improvements in its gross margin, management expects EBITDA to be in the range of $24 million to $27 million this year, representing year-on-year growth of 30% to 45%.

Should you invest?

Based on its guidance I estimate that Baby Bunting’s shares are changing hands at approximately 23x forward earnings.

While I would say that this is about fair value for its shares now, I would still be tempted to invest with a long-term view. After all, with four of its largest competitors in administration, there’s certainly a lot of market share up for grabs. Furthermore, I believe it is likely to lead to improvements in its buying power and stronger margins.

As such, this could be a small cap retailer to buy along with Noni B Limited (ASX: NBL) and Specialty Fashion Group Ltd (ASX: SFH).

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Motley Fool contributor James Mickleboro 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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