In early trade the Baby Bunting Group Ltd (ASX: BBN) share price has rocketed 11% to $1.64 after the baby products retailer released its half-year results to the market.
Here are the key takeaways:
- Sales of $148.3 million, up 9.8% on the prior corresponding period.
- First-half comparable stores sales down 1.7% due to price deflation of 4.3%.
- Pro forma EBITDA was down 19.2% to $8.4 million and pro forma NPAT was down 27.2% to $4.2 million.
- Fully franked interim dividend of 2.8 cents per share.
- Earnings per share of 2.8 cents.
- Outlook: FY 2018 EBITDA guidance unchanged and expected to be around $23 million.
Overall I felt this was a positive update and largely in line with expectations.
For those unfamiliar with Baby Bunting, the company has been a victim of its own success this year. A number of its smaller competitors have been driven out of business, leading to heightened levels of clearance sales.
In order to maintain its market share, Baby Bunting has price matched its competitors at the expense of its margins. This, and the opening of new stores, has ultimately led to a sizeable increase in sales and a greater market share, but also a significant decline in profits.
Pleasingly, there are signs that the worst is over now. Management advised that comparable sales are up 4.5% so far in the second-half and gross margins have been improving ahead of guidance. Furthermore, it reiterated its FY 2018 EBITDA guidance of around $23 million.
Although this will be flat year-on-year, it will be a marked improvement on its first-half performance and puts it in a great position to outperform in FY 2019 if the momentum can be carried over.
Should you invest?
Even after today's strong gain, Baby Bunting's shares are priced at about 20x trailing earnings and provide a generous trailing fully franked 4.3% dividend.
Although 20x earnings may be a premium to other specialty retail shares such as Greencross Limited (ASX: GXL) and Accent Group Ltd (ASX: AX1), I think it is worth remembering that there is a fair chance that earnings growth will accelerate significantly in FY 2019 and beyond as the company leverages its increased market share.
In light of this, I think Baby Bunting is still worth considering as an investment today.
