'Premium warranted': Why this ASX 300 share just surged 23%

Baby Bunting shares are skyrocketing today despite the company reporting a 51% profit decline in FY23.

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Key points

  • ASX 300 share Baby Bunting is trading 23% higher today at $2.05 per share
  • The kids' clothing retailer has released its unaudited full-year FY23 results, which reveal a 51% fall in net profit after tax 
  • Wilsons has an overweight rating on Baby Bunting shares and increased its 12-month target price to $2.10 after seeing the company's report 

ASX 300 share Baby Bunting Group Ltd (ASX: BBN) is screaming 23.12% higher on Tuesday to $2.05 per share.

This follows the kids' retailer releasing its unaudited full-year FY23 results after the market close yesterday. Baby Bunting will report its official audited numbers on 11 August.

Meantime, the S&P/ASX 300 Index (ASX: XKO) is up 0.36% today.

ASX 300 share skyrockets despite 51% profit decline

Baby Bunting shares are skyrocketing despite the company reporting a 51% decline in net profit after tax (NPAT).

However, the company points out that its unaudited pro forma NPAT of $14.5 million is at the upper end of its FY23 guidance, which was $13.5 million to $15 million.

Here are the highlights of today's report:

  • Unaudited pro forma NPAT $14.5 million, down 51% on FY22
  • Full-year sales of $515.8 million, up 1.7% on FY22
  • 2H FY23 sales totalled $260.9 million, down 2.7% on 2H FY22
  • Comparable store sales down 3.6% in FY23
  • Gross profit margin of 37.4%, down from 38.6% in FY22
  • Inventory totals $98 million as at 30 June, up 1.3% on FY22
  • Net debt $6.2 million as at 30 June, up 786% on FY22.

What else happened in FY23?

Baby Bunting opened seven new stores in FY23 and expects to open five new stores in FY24.

The new Australian stores will be in Cranbourne in Victoria and Maroochydore in Queensland.

The three New Zealand stores will be in Auckland (two stores) and Christchurch.

What did management say?

Acting CEO Darin Hoekman said the second half of FY23 was difficult as consumers cut spending.

He said:

June is a key promotional period. … the first two weeks of the period saw trading in stores and online well below expectations with comparable store sales of around negative 21%.

In the final 3 weeks of the promotional period, trading improved as customers responded more positively to our offers, with comparable store sales in the final weeks of the promotion being negative 9.4%.

What's next?

In its statement today, Baby Bunting said it "has identified a range of initiatives to simplify elements of its operating model" and cut costs.

Net debt at the end of FY23 was $6.2 million compared to $700,000 at the end of FY22.

Baby Bunting pointed out that it has "$58 million headroom in its $70 million banking facility and considerable clearance in its banking covenants".

Broker says ASX 300 retail deserves a premium

Wilsons analyst John Hynd is happy with the retailer's report, quipping that Baby Bunting is "crawling in the right direction", according to The Australian.

Wilsons has an overweight rating on Baby Bunting shares and has increased its 12-month target price to $2.10.

Hynd said:

We believe a premium is warranted due to BBN's physical dominance of the baby goods category in Australia.

Our TP is upgraded by +50cps, with the FY24e cost-out program announced by BBN driving upgrades of 30cps.

Another broker Citi appears to be more cautious on Baby Bunting shares.

The Australian Financial Review (AFR) reports that Citi has raised its rating to neutral with a price target of $1.65. This implies a potential downside of almost 15%.

Baby Bunting share price snapshot

The Baby Bunting share price is down 26.6% over the year to date while the ASX 300 is up 6.8%.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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