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Baby Bunting share price drops lower on AGM update

In morning trade the Baby Bunting Group Ltd (ASX: BBN) share price has dropped lower following the release of its annual general meeting presentation.

At the time of writing the baby products retailer’s shares are down 2% to $3.64.

What was in the presentation?

As well as reminding shareholders of its strong performance in FY 2019 which saw the company post a 19% increase in total sales to $362.3 million and a massive 58.2% lift in net profit to $15.1 million, the presentation included a trading update.

According to the release, Baby Bunting has had a solid start to the year and the business continues to be on track to deliver on management’s FY  2020 guidance despite issues with its online business.

The company’s CEO and managing director, Matt Spencer, explained: “Comparable store sales growth of 3.1% year-to-date reflects the cycling of the unusual trading conditions in Q1 FY19 as a result of the closure of Babies R Us and our clearance activity of some high end cots and prams in September 2018. Online sales year-to-date were affected by technical issues associated with the transition to our new web platform. However, we expect to see online sales growth momentum continue to build. Our guidance assumes comparable store sales growth to be mid-single digits for the year.”

Mr Spencer also revealed that the company’s gross margin has continued to expand and is up 270 basis points from the same time last year to 36.6%. This is also 166 basis points higher than what the company achieved in FY 2019 as a whole.

He then concluded by reaffirming Baby Bunting’s guidance for FY 2020.

“The outlook for FY20 remains unchanged from that announced on 16 August 2019. Pro forma NPAT is expected to be in the range of $20.0 million to $22.0 million. Pro forma EBITDA (as measured under the old lease accounting standards), is expected to be in the range of $34.0 million to $37.0 million,” Mr Spencer said.

This guidance implies year on year net profit after tax growth of up to ~46%.

Should you invest?

Whilst I am a fan of the company and have been recommending it for some time, I feel its shares are close to being fully valued now.

As a result, I would class its shares as a hold on valuation grounds and would be a buyer of either Accent Group Ltd (ASX: AX1) and Super Retail Group Ltd (ASX: SUL) instead.

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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 Super Retail Group Limited. The Motley Fool Australia has recommended Accent Group. 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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