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Why the Baby Bunting Group share price has exploded recently

Shares of Australian infant products retailer Baby Bunting Group Ltd (ASX: BBN) have been on a tear recently. Since the beginning of August, Baby Bunting’s share price has soared almost 50% higher to $3.47 as at the time of writing, even reaching a new all-time high of $3.76 earlier this month. 

So why the sudden surge in the Baby Bunting share price?

Prior to August, Baby Bunting’s shares had spent most of 2019 trading more or less sideways, hovering around the $2.25 mark and never really seeming able to break through the psychological $2.50 barrier. But the company’s FY19 results announcement changed all that.

Baby Bunting reported that its sales had increased 21% to $368 million in FY19, while significant margin expansions meant earnings before interest, tax, depreciation and amortisation (EBITDA) and net profit after tax (NPAT) grew at faster rates than its top line. EBITDA was up 37% to $24 million, while NPAT surged 43% to a little over $12 million.

It was a strong result across the board for Baby Bunting: it increased its market share, added 6 new stores to its retail network, grew its online sales, and generated a much higher percentage of sales from its private label and brand products. The company even managed to deliver slightly above its FY19 pro forma guidance for EBITDA, which tends to send a positive signal to the market.

And despite recession fears dampening the outlook for the broader retail sector in the coming year, Baby Bunting CEO and Managing Director, Matt Spencer, still forecasts strong sales growth, stating that his industry ‘is somewhat less discretionary than the broader retail sector’.

Guidance for FY20 is surprisingly bullish, and demonstrates the company’s confidence in the growth initiatives it has planned for this year. Pro forma EBITDA for FY20 is forecast to be in the range of $34 million to $37 million, or an uplift of between 25% and 36%. Pro forma NPAT is expected to be in the range of $20 million to $22 million, which would represent significant growth of between 32% and 46% over FY19 pro forma NPAT.

Should you invest?

After delivering such positive results in FY19, and with management forecasting another banner year for the company in FY20, it’s no wonder investors have been flocking to Baby Bunting over the last few months. But this has inflated its share price quite substantially over other retail stocks.

Based on its FY19 results, Baby Bunting currently trades at a multiple of about 35 times earnings, which makes it significantly more expensive than fellow retail stocks like Myer Holdings Limited (ASX: MYR) or Kathmandu Holdings Limited (ASX: KMD), which both currently have price-to-earnings ratios in just the mid-teens.

However, it’s not so dissimilar to Premier Investments Limited (ASX: PMV), which also saw a recent jump in its share price coming courtesy of its own record sales results in FY19. Shares in Premier Investments currently trade at a little under 29 times FY19 earnings.

This demonstrates that, as a growth stock in the retail sector, Baby Bunting may still offer decent value to investors, even at current prices. While it is trading at prices significantly above retailers like Myer and Kathmandu, when compared to a fellow high-performing company like Premier Investments it becomes less expensive.

It also goes to show that even when economic forecasts for the retail sector seem constantly dour, innovative and well-run companies like Baby Bunting, JB Hi-Fi Limited (ASX: JBH) and Ltd (ASX: KGN) still find ways to succeed.

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Motley Fool contributor Rhys Brock owns shares of ltd. The Motley Fool Australia has recommended ltd and Premier Investments 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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