After an initially promising 12-month period from listing in October 2015 during which its share price increased more than 50%, Baby Bunting Group Ltd (ASX: BBN) has since reversed all those gains and then some.
Baby Bunting shares are now down more than 25% from their initial listing price and it recently released a trading update stating pro forma FY2018 EBITDA is expected to be similar to what was achieved in FY2017.
Management blamed the reduction in earnings guidance on increased competition and aggressive discounting which is putting pressure on sales margins. While Baby Bunting is expecting to open six new stores in the second half of FY2018 and increase market share, same store sales to 13 November have been flat.
It has been a disappointing turn for a company that increased revenue by 17.4% and statutory net profit after tax by 47% in FY2017.
Over that period Baby Bunting also opened six new stores and enjoyed impressive comparable store sales growth of 6.9%. The outlook for further growth in FY2018 appeared positive, driven by new store rollouts and higher private label and online sales.
Taking a look at the financial position for FY2017, Baby Bunting had little debt and a decent cash balance. Inventories had increased though this is somewhat expected due to the greater number of stores. Investors should keep an eye on the inventory level relative to sales as it can be an early indicator of liquidity issues for retailers.
Baby Bunting generated positive operating cash flows for FY2017, however total dividends paid represented almost 90% of net cash generated from operating activities. I expect significant investing cash outflows again in FY2018 if new stores are opened as expected. If the dividend were to be reduced, then Baby Bunting's share price could experience further downward pressure.
Foolish takeaway
Without trying to sound like a broken record, ASX-listed retailers have seen their share prices suffer downward pressure due to the imminent arrival of Amazon.
I'm certain this factor has somewhat affected Baby Bunting as well. While I believe the threat of Amazon has been overstated for certain sectors, I do have broader concerns for Australian retail conditions in the short to medium term.
I don't believe parents will stop going in to stores like Baby Bunting to physically check out their goods for sale, but once they've made a purchase decision will they buy in-store or find a cheaper price online? I think this is a case of wait-and-see.
With Baby Bunting currently trading at around 13.5x FY2017 pro forma earnings, I would not be a buyer until the company can show sustainable like-for-like sales growth and increasing profitability in this challenging environment.
