
FY23 was not greatĀ for Baby Bunting. the business was trying to deal with declining sales due to long term demographic shifts (ie birth rates in Australia continue to decline, as in many countries).
BB invested in geographic expansion to solve this problem, opening 4 new stores including one in New Zealand, plus a NZ distribution centre. This gave them revenue growth of 1.7% but a 50% drop in operating profit - causing the share price to plummet.
The companyās punt was new store investment - their stores take on average 4 years to earn back their investment, at which they should each be adding just under $8m revenue with EBITDA of ~19%.
Declining profits means new store growth needs to be funded by lending if BB wanted to reach its target of 120+ stores within a few years.
So whatās happened since then?
New CEO Mark TepersonĀ commenced in October 2023, just in time to see FY24ās horrible first half resultsĀ in February 2024:
Sales fell 2.5% compared with FY23 first half
EBITDA dropped by 12.6%
Net Profit collapsed 31.3%
Teperson was looking for good news when those results were announced:
āTrading has tended to be softer outside promotional periods with our customers more attracted to key promotional events during the year such as the Boxing Day promotion, while the Black Friday promotion was our largest everā
But thatās not good news at all - it simply highlights that its customers are suffering from cossie livsĀ just like the rest of Australia & New Zealand. 4 new NZ stores were opened though (gotta make use of that expensive DC), which is still the plan: expand store numbers to grow the top & bottom lines.
Mayās ASX retail bloodbath
After six consecutive months of declining retail sales (including Christmas and New Year), Australiaās two-speed consumer spending patterns became clear. With older and wealthier Australians spending, younger people had been consistently spending less. Retailers with more exposure to younger Australians were suffering, with shares losing valueĀ in May 2024:
JB Hi-Fi: -5.2%
Harvey Norman -3.8%
Super Retail Group -5.5%
Temple & Webster -18%
Baby Bunting -23%
Tepersonās May market updateĀ was really interesting, and explained why the share price dropped so dramatically:
Sales Second half sales down 7.7% compared with the same period in FY23 - obviously getting worse
An admission that price reductions in March and April didnāt really work, so even though customer transaction numbers were up, average spend was down
Some operational improvements in freight costs from combining shipments as all stores can now fulfil online orders
Inventory reduced by $10m - given store numbers have increased itās strange to hold less stock, but this will help their cashflow to have less tied up in inventory
Net Debt unchanged year on year (they still need that debt to expand)
To summarise: BB is doubling down on The Punt: keep opening new stores rapidly in the hope that when theyāre all up and running, Revenue and Profit will return. If sales decrease in the meantime, reduce investment in stock to free up cash to assist in trading through.
But then came June and everything was ā¦ better for Baby Bunting?
When things are bad, you look for any good news you can. Anything that can prove The PuntĀ Ā the plan is working is helpful.
Remember that 7.7% Sales decline reported in May, covering FY24 Second Half to date? That got better: In the 7 weeks and 5 days from 1 May to 24 June, Sales were down 0.7% compared with the same period last year.
Thatās a green shoot - and not a very big one.
But it was enough to support the announcementĀ that the full year profit guidance (of $2m to $4m) is still achievable.
But what did investors make of it? Because Australian retailers are all doing it tough, the market celebrated this win: BBās share price shot up 19%.
What a Rollercoaster!
2024 is not a fun time to be an Australian retailer.
Share prices aside, Baby Buntingās plan makes sense: it sells products to a slowly declining market, that is currently spending less than it has previously. So BB really had no other viable option to generate growth than:
open more stores to sell to customers who were previously buying from competitors like Target/Kmart
reduce prices where possible to improve sales volume
look critically at inventory and reduce where possible - its $10m saving is more than 10% of total inventory
renegotiate supplier agreements (and get some more good news with exclusive agreements with Nuna Baby Australia and Bugaboo NZ)
remodel inefficient processes like split orders generating additional freight cost (that canāt be passed through to customers)
Baby Buntingās plan is now looking less like a Big Punt, and more like a well-executed Plan, than it did in 2023.
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