Baby Bunting: FY23 profit down 50pc, so why are they getting broker upgrades?

The Baby Bunting Group (ASX: BBN) wisely baked in an ordinary looking FY23 result back in a late June trading update, when its share price collapsed some 22% following some hard truth-telling from the company which sells stuff for babies and toddlers.

The pram and baby seat business always appeared a steady bet, and last week’s net profit (after tax) of $9.9 million, down 49.5% on last year has rattled some rattles.

However, brokers at both Ord Minnett and Morgans have this week upgraded BBN, perhaps with an eye on a turnaround – noting that despite the profit slump, BBN’s total FY23 sales actually grew, up 1.7% on last year to $515.8 million.

What else?

NPAT was $14.5 million, down 51% on the previous year while earnings before interest, tax, depreciation and amortisation (EBITDA) – at $31.2 million – were also down well over 38% on the prior 52-week period.

Comparable store sales were down 3.6% from 5% recorded in FY22, with online sales of $103mn now representing 20% of total sales.

The BBN FY23 gross margin was 37.4%, with the company reckoning that this improved through the second half, thanks largely to local international shipping cost reductions and new ranges of private label products as well as some changes to the loyalty program introduced at the end of 1H.

The company launched its Baby Bunting Marketplace in June, this year, which is about letting third-party sellers flog a curated range of products on babybunting.com.au.

It now has more than 5,000 SKUs available and plans to finish FY24 with 20,000 SKUs from 150 retail partners.

The baby retailer also opened its first store in Auckland in August last year, which BBH says is now run-rating at A$4.5 million in annualised sales with positive earnings contribution through 2H23.

Three new stores are due to open in FY24, in the Kiwi-Heights of Sylvia Park, Manukau and Christchurch.

“We have continued to grow market share and experienced positive sales growth despite the increasing macroeconomic factors impacting the retail sector,” according to Baby Bunting’s acting CEO Darin Hoekman.

“While our category is less discretionary, our customers are not immune to cost-of-living pressures and we experienced sales decline towards the end of the year as consumer spending slowed.”

Hoekman says BBN now wants to lower its business costs and better manage “working capital to align to sales and the ongoing uncertainty around the trading environment.”

“We are holding the right levels of inventory with minimal seasonal and clearance stock.

“Our net debt is modest and we have plenty of headroom in our banking facility. We have taken steps in July to reduce overheads and to manage cost inflation in stores and in our supply chain.

“We will continue to invest for growth and our store network expansion will continue in FY24.”

Now here’s what the brokers said:

Ord Minnett Upgrades BBN to Accumulate from Hold:

BBN delivered a 51% decline in underlying net profit in FY23, in line with the guidance provided in July.

Ord Minnett analysts say the short-term for BBH is a little shaky with challenging trading conditions, made harder by the cycling of strong comparable sales growth in the first quarter.

“While household expenditure is likely to remain under pressure, the business should return to growth in the second half of FY24,” the broker adds.

The BBN rating is upgraded to Accumulate from Hold and the price target (PT) raised to $2.35 from $1.60, and if BBN hits the Ord Minnett PT it will return circa 12% (excluding dividends, fees and charges).

The broker forecasts FY24 dividend of 9.5 cents and EPS of 13 cents.

Morgan Stanley rates BBN as Equal-weight:

Target price (TP) of $1.65 and should BBN hit the MS target it will return circa -21% (ex-div).

(Current consensus PT is $2.16, suggesting upside of 3.3%)

There were few surprises for Morgan Stanley in BBN’s well-telegraphed FY23 profit result of $14.5m.

Costs of doing business were up $16.5 million against the prior corresponding period, with the key contributors being new and annualising stores, cost inflation (including wage inflation) and one-off establishment costs associated with Baby Bunting’s newly launched marketplace and its initial expansion into New Zealand in 2023.

“Despite a history of issuing guidance at this point of the year, management declined, and there was no update on gross margin even though the 2H was below the broker’s expectation.

“More positively, management pointed to a net $6-8m improvement on the -$162m for cost-of-doing-business (CODB) in FY24, and will incur less than -$1m in transformation costs compared to the original budget of $5-7m,” the broker says, forecasting a FY24 EPS of 10 cents.

Morgan Stanley’s Equal-weight rating and $1.65 target are maintained.

Citi rates BBN as Neutral:

Citi lifted its PT for Baby Bunting to $2.20 from $1.65 on the back of the FY23 results.

If BBN hits the Citi target it will return circa 5% (ex-div). FY24 dividend forecast of 9.6 cents and Earnings Per Share (EPS) of 13.5 cents.

“While sales continue to trend negatively, the comparisons get easier to cycle through the first half of FY24 and cost-out provides some buffer against operating deleverage.”

The broker retains its Neutral rating because of lingering concerns around exactly how non-discretionary Baby Bunting’s sales truly are.

Citi’s also uncertain over the strategic direction with the new boss starting in October. For now, sales remain under pressure given the like-for-like sales decline of -9% for the first six weeks of FY24.

Macquarie rates BBN as Neutral:

FY23 results from Baby Bunting were previously reported, with like-for-like sales down -3.6%.

Macquarie maintains like-for-like sales assumptions for FY24, expecting a contraction of -1%.

“Yet the composition of forecasts has now changed with a larger decline in the first half expected of -5% and a recovery in the second half of 3.2%.”

With BBN both looking to cut costs and open five new stores including three in New Zealand in FY24, the broker envisages the $6-8m cost reduction program in FY24 is a positive, but “caution prevails” given the current operating environment.

Macquarie says it expects a FY24 dividend of 8.6 cents and EPS of 14.3 cents.

The Neutral rating is maintained. Target rises to $2.10 from $1.55.

Morgans rates BBN as Upgrade to Add from Hold:

Baby Bunting results were largely in line with those pre-released in late-July though Morgans increases its profit estimates for FY24 and FY25 due to cost-out initiatives and higher sales assumptions.

The broker raises the PT to $2.50 from $1.90, and the rating is upgraded to Add from Hold, with Morgans citing a) the higher profit estimates, b) business model roll forward and c) higher peer multiples.

The FY23 dividend of 7.3cps was in line with Morgans’ forecast but above the consensus estimate. Overall sales growth of 4.4% is expected in FY24 driven by an expansion of the store network and the launch of the online marketplace.

Target price is $2.50 and Morgans forecasts FY24 dividend of 9.9 cents and EPS of 14.3 cents.