The Baby Bunting Group Ltd (ASX: BBN) share price has been an impressive performer over the last 12 months with shares returning over 200%.
Despite Baby Bunting shares trading at close to all-time highs, are they still good value?
BBN share price chart
Baby Bunting is a retailer of baby goods that distributes its products through 59 physical stores and an online offering. It typically caters to parents with children from newborn to three years of age.
What’s to like about Baby Bunting?
In my view, the less discretionary nature of baby products definitely makes for a stronger investment case compared to other retailers that might sell electronic accessories for example, which might be considered not as essential.
Many retailers have experienced a boost from the onset of COVID-19, but Baby Bunting has been able to maintain this growth over the last six months as well, which you can read about here.
A couple of highlights in Baby Bunting’s HY21 results were a 16.6% increase in total sales and comparable store sales growth of 15%. Online sales were a standout, which were up 95.9%, while click and collect sales jumped by 218%.
The New Zealand expansion was confirmed to be underway, which represents a NZ$450 million opportunity. Baby Bunting’s market research indicated that 76% of respondents would be happy to shop with the company.
Currently, there are no large-format speciality baby retail chains in New Zealand. The company anticipates the first store will be opened in New Zealand in FY22, with a total of 10+ stores in the network plan.
Are Baby Bunting shares good value?
Like many retailers, Baby Bunting runs on a fairly slim net profit margin and typically achieves a margin between 2.5% to 3%. However, its $700 million market capitalisation means that its shares trade on fairly inflated trailing price-to-earnings (P/E) of roughly 70x based on FY20 earnings. In comparison, the average P/E ratio in the retail sector is ~20x.
Being still early on in its growth phase, Baby Bunting continues to reinvest in the business to support its growth strategy and I think it’s likely that margins will be significantly higher once its full store network is operational.
Its new distribution centre currently being built in Melbourne will ideally improve supply chain efficiencies and drive gross margin expansion by increasing stock availability and driving down rental costs.
As the business continues to scale to its full capacity of over 100 stores, management believes that more operational efficiencies and operating leverage will be achieved. Additionally, as its New Zealand expansion continues to unfold, it seems likely that it could achieve even more economies of scale, further increasing its profitability over the long-run.
For more stock ideas, click here to read: 2 ASX tech shares I’m watching in March.