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Could this retailer deliver 200% returns over the next 12 months?

I think one of the best things about the share market is its volatility. People decide to sell shares for a variety of reasons, sometimes purely out of fear. Just because a share price has gone down doesn’t mean it won’t go back up again.

Some shares are sold off more heavily than they perhaps deserve to be. A whole host of retail shares have been driven lower by Amazon’s entry into the already-competitive retail space. Will they all be hit heavily?

Baby Bunting Group Ltd (ASX: BBN) has been one of the ones to suffer the most with the share price falling almost 60% from its 2016 high to the low earlier this year. The baby retail space is a tough sector with several of its competitors going into administration.

Most of your peers going out of business means either that the baby industry is doomed, or that Baby Bunting is about to have a clean run.

Robert Frost from OC Funds Management pointed out that 79% of Baby Buntings’ top 250 selling products are not available on Amazon. Of the remaining 21% that are sold on Amazon, Baby Bunting is cheaper for the majority of products. Amazon is cheaper in only 6.8% of Baby Bunting’s top 250 products and they are only cheaper by 7% on average, which isn’t a huge game changer.

He also made the point that $138 million of sales have left the industry thanks to competitor closures, meaning Baby Bunting can take up this space as the only national retailer.

The share price of retailer Adairs Ltd (ASX: ADH) has risen by about 250% since its low last year, can Baby Bunting reach similar heights?

With Baby Bunting reporting that total sales growth was 16.5% in the first six weeks of the following financial year and comparable store sales growth was 9.8% it’s easy to imagine that FY19 will be a bumper year. Management have already predicted that earnings before interest, tax, depreciation and amortisation (EBITDA) growth will be between 30% to 45% in FY19.

Foolish takeaway

Baby Bunting’s share price is already up by 93% since its low earlier in the year, you can see that investors may get even more excited by what the company could achieve in the next year or two. It could gain 50%-ish more sales just from the competitor’s closures and higher profit margins.

However, I wouldn’t describe it as a screaming bargain and I imagine Amazon will ramp up the pressure as it gets bigger in Australia. I’d keep it on the watchlist for now.

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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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