Having followed the Baby Bunting Group Ltd (ASX: BBN) business with interest for some time, after reviewing its latest financial result I’m getting much more interested.
Babies & Bathwater
Baby Bunting is a retailer that specialises in baby goods such as prams, cots, car safety equipment, toys, feeding and other accessories. The company has 52 stores in Australia with plans to grow the store count beyond 80 over the next few years.
In August last year, Toys R Us and Babies R Us decided to close their combined 45 stores in Australia. These two businesses were the main competitor to Baby Bunting, and combined had a 30% market share. The announcement of the store closures had an impact on Baby Bunting shares with them rallying strongly. But over the ensuing months, their shares had drifted lower again.
Their recent result showed signs that the lower levels of competition has led to improved margins. The company has forecast even stronger margins in the years ahead. No doubt margins were impacted by the heavy discounting as the Toys R Us and Babies R Us stores liquidated stock late last year.
Babies First
One of the main concerns in the share market at present is the Australian consumer. The recent housing downturn has led to lacklustre Australian retail sales. As a result, most of the ASX listed discretionary retailers have had their share prices heavily discounted in anticipation of weaker sales and profits.
I think because of the reduced competition Baby Bunting will be able to buck the consumer trend and continue to show sales growth and expanding margins. While there were hints of a weak consumer in the reporting season, families tend to sacrifice other discretionary spending over providing for their babies. I also envisage Baby Bunting will now be operating in a more ‘rational’ pricing market.
The risk to this is of course further competition. With the arrival of Amazon into Australia, many believed that traditional retailers would struggle to survive. However, Amazon.com Ltd (NASDAQ: AMZN) flagged their entrance into Australia well before they arrived and most quality retailers were well prepared for Amazon’s entry. Baby Bunting has a strong online presence with major upgrades to its website to be ready next month.
With a store roll-out plan, an improved digital platform and an opportunity to take the lion’s share of the 30% of the industry that has been shut down, Baby Bunting may be one to back up the pram on.
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