The Baby Bunting Group Ltd (ASX: BBN) share price fell over 20% today after a trading update. Despite the negativity, I think it’s a buy.
For people that don’t know, Baby Bunting is a leading retailer of almost everything a baby could need – clothes, prams, car seats, toys, furniture and so on.
AGM update causes alarm
Baby Bunting held its annual general meeting (AGM) today.
As at 7 October 2022, the financial year-to-date update showed that total sales had grown 12%, cycling 2.1% growth last year. There was total transaction growth of 15.2%.
It also said that there was comparable store sales growth of 7.6%, cycling against negative 0.9% last year.
Online sales only made up 19.6% of sales, down from 28.6% in the prior corresponding period.
However, while there was sales growth, there was a major negative – the FY23 first quarter showed that the gross profit margin fell 230 basis points (2.30%) compared to a year ago.
The business said that inventory levels are “well controlled”. However, the ‘pro forma’ net profit after tax (NPAT) for the first quarter “$3 million below Q1 FY22”.
It has opened three new stores in the first quarter and expects to open a further five new stores in FY23, four in Australia and one in New Zealand.
What happened to the profit margin?
The margin was below management’s expectations, though the first quarter is the smallest period of earnings.
Baby Bunting was expecting a small year on year reduction in the gross profit margin as a result of its loyalty program only starting in November, plus more products moving to “every day low price”.
But the decrease was worse than expected.
It has maintained entry price points across its range. During the quarter, some of its competitors have discounted top selling items to drive sales. Baby Bunting’s ‘5% price promise’ means it won’t be beaten on price.
Baby Bunting has also experienced some unrecovered cost increases, where input costs have risen faster than retail prices, due to higher domestic freight charges and some foreign currency exchange movements.
There has also been heavy playgear discounting in the marketing, hurting the gross margin by around $1 million.
My thoughts on the Baby Bunting share price
I think Baby Bunting is one of the most interesting retailers on the ASX. It usually has good operating leverage and an impressive growth plan. It’s also a solid dividend payer.
A growing store network, selling more products and an end to this period of discounting would all be useful catalysts. There was a similar period in 2017 to mid-2018 of discounting in the sector, but then Baby Bunting came out stronger. It’s that past experience that makes me believe that the Baby Bunting share price is an opportunity.
