Shareholders have spat the dummy with the Baby Bunting Group Ltd (ASX: BBN) share price falling again today following the toy retailer’s disappointing trading update on Tuesday.
The Baby Bunting share price lost 0.9% to $3.47 as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed 0.7%.
Most retailers are also having a bad day. The Harvey Norman Holdings Limited (ASX: HVN) share price slumped 2% to $4.40, the JB Hi-Fi Limited (ASX: JBH) share price tumbled 1.6% to $34.76 and the Wesfarmers Ltd (ASX: WES) share price fell 1.8% to $38.69.
Weakness may not last
But Baby Bunting is the one in the “time out” corner as the stock has given up around a third of its value over two days after management warned that like-for-like sales slowed in the last eight weeks.
However, the drop in its share price could be a buying opportunity as most top brokers are sticking to their “buy” recommendation on the stock.
Citigroup is one that’s still bullish on Baby Bunting as it believes the sales slowdown is temporary.
“The AGM trading update implies LFL sales growth slowed to +1.5% (CitiE) over the last 8 weeks of 1H20e (till 6 Oct 19) relative to the first 6 weeks (+5.2%),” said Citigroup.
“We forecast LFL sales to improve over the remaining 12 weeks of 1H20e to +5.1%.”
The improvement is driven by online sales momentum, management’s FY20 guidance which implies mid-single digit LFL sales growth, the end of clearance sales by competitors that are closing down and the company’s newly launched exclusive brand Nuna.
Citi has a price target of $3.94 a share.
Gross margin a redeeming factor
Macquarie Group Ltd (ASX: MQG) is another urging investors to buy the dip. While LFL sales slowed recently, the broker is encouraged by the retailer’s better than expected gross margins which increased by 270 basis points to 36.6%.
This was underpinned by private label and exclusive product penetration growth, and lower clearance activity.
“Seasonally 1Q20 is a lighter sales period (<20% sales FY historically). Given the strength in [gross margin], a recovery in [LFL sales] towards target implies that the mid-to-upper end of guidance is achievable,” said Macquarie.
Macquarie has a 12-month price target of $3.80 per share.
Meanwhile, Morgan Stanley reiterated its “outperform” recommendation on the stock as the broker was also impressed with Baby Bunting’s gross margin expansion and its car seat installation acquisitions (this business delivered LFL growth of 29% year-on-year).
Morgan Stanley’s price target on the stock is $3.50 a share.
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The Motley Fool Australia owns shares of and has recommended Wesfarmers 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.