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Why this small cap share rocketed 22% higher today

One of the biggest movers on the market on Monday has been the Baby Bunting Group Ltd (ASX: BBN) share price.

In morning trade the baby products retailer’s shares were up as much as 22% at one stage. They have since given back some of their earlier gains, but still sit over 14% higher at $2.27 at the time of writing.

Why are Baby Bunting’s shares rocketing higher?

This morning Baby Bunting released a trading update to the market ahead of its annual general meeting.

That update revealed that the company’s strong start to FY 2019 has continued with total sales growing 17% year to date on the prior corresponding period. A key driver of this growth has been an impressive 9.6% increase in comparable store sales.

Pleasingly, the easing of competitor clearance activities means that Baby Bunting’s margins have recovered strongly. At present the company is on track to finish FY 2019 with a gross margin in excess of 34%.

Price deflation put pressure on its margins in FY 2018 and led to the company’s gross margin falling to 33.3%.

In light of this improving performance, management has increased its EBITDA guidance for the full year from the range of $24 million to $27 million to the range of $25 million to $27 million. Both exclude employee equity expenses.

The new guidance represents year on year growth of between approximately 34% and 45%.

Management also advised that it expects to open a further two new stores prior to Christmas, bringing its store network to a total of 52 stores.

One of these stores will be in Chadstone shopping centre and the other will be at Bankstown in a former Toys R Us / Babies R Us location.

Plans are also progressing for a store at Shellharbour near Wollongong, which would be the sixth new store for the company in FY 2019.

Should you invest?

Based on the company achieving the middle of its guidance range, I estimate that Baby Bunting’s shares are changing hands at 23x forward earnings.

While this is by no means cheap, especially for retail shares, I think it is fair value for Baby Bunting.

Now that clearance activities from closing competitors have eased, the company appears well-positioned to benefit from solid sales growth, increasing margins, and expansion opportunities.

As a result, I think it could prove to be a good buy for investors looking for exposure to the retail sector.

In addition to Baby Bunting, Bapcor Ltd (ASX: BAP) and Super Retail Group Ltd (ASX: SUL) could also be worth a closer look.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia owns shares of Super Retail Group Limited. 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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