The baby boom era may well be past us, but that hasn't stopped the Baby Bunting Group Ltd (ASX: BBN) share price from surging almost 80% year to date, leaving investors wondering whether this baby horse has already bolted.
According to a fresh note from Macquarie's equity research team, Baby Bunting's growth story is gaining momentum, powered by the company's "Store of Future" strategy, but the analysts are not yet getting carried away.
Image source: Getty Images
What Macquarie is seeing
Macquarie says Baby Bunting's "Store of the Future" strategy (which is essentially a store refurbishment rollout) is showing promising early signs. For example, refurbished stores are delivering an average 30% uplift in sales, up from 28% in August.
This (along with solid NPAT guidance) has prompted Macquarie to lift its 12-month share price target to $3.15 (from $2.50), which is a tidy upgrade, but implies only a 5.7% total shareholder return from the current $3.00 share price.
The recommendation? Still neutral. Put simply, Macquarie likes the direction, but its valuation is close to the current share price (implying minimal upside) and needs to see more execution and proof that this growth spurt can keep going.
Now what?
The big takeaway is this: Baby Bunting's comeback is off to a strong start. The store strategy is working, customer traffic is improving, and margins are trending higher. But after an 80% rally, it's worth proceeding with caution.
Macquarie's $3.15 target implies that, at least for now, the stock is fairly priced for the progress it's made. Future upside likely depends on the company proving that its "Store of the Future" rollout can consistently deliver growth without compromising profits.
For investors, the story has shifted from survival mode to execution. If Baby Bunting can keep those refurbished stores buzzing, the next leg of growth could be a happy surprise.
It's also worth noting that, despite the recent run, Baby Bunting shares are still down 40% over the last five years. It's easy to get caught up in all the recency bias, but if the fundamentals keep improving, then the share price could rise much higher.
Until then, Macquarie's neutral rating is essentially a "wait and see."
Foolish Bottomline
After an 80% rally, Baby Bunting looks like a stock that's finally ready to put on its big boy pants. I think it's a long road ahead with plenty of upside potential, but only if the fundamentals continue to improve. Like all baby steps, however, falls should be expected. The market is always looking ahead, and likewise, investors should also be thinking of what comes next. Baby Bunting may need a few more steps before it starts running again.
