Neighbours recently left a used pram on their footpath for anyone to take. The pram, a little tattered after a few years of heavy use, was in good working order and from a popular brand. So, we snaffled it as a back-up for our infant niece when she visits.
The pram reminded me why the baby-goods industry is attractive. Some consumers, particularly first-time parents, would never buy second-hand baby goods. Others would never try to sell second-hand baby goods, even though they still have value.
There is, of course, always a market of people who happily buy and sell second-hand baby goods to make or save money. But this is a market where consumers, particularly nervous parents, will pay higher margins for advice and trusted brands.
That trend is gold for category killers that have specialist staff who know their baby goods and have good customer rapport. This need for advice means baby-goods retailers, compared with most other retail segments, have better protection from online rivals.
Industry standards create other barriers to entry. Australian baby goods, thankfully, require a long list of standards to be met. Some are unique to Australia, meaning international shopfront and online retailers find it harder to enter parts of our baby-goods market.
Poor performances from discount department stores are another positive for specialist baby-goods retailers. Target, K-Market and Big W, once fierce competitors in some baby-goods segments, are struggling. Target made a strategic error earlier this decade when it seemed to move away from its valuable branding as the store for young mums – a position it appears determined to rebuild.
This is a good backdrop for Baby Bunting Group, Australia’s largest speciality baby-goods retailers and a 2015 ASX listing through an Initial Public Offering.
Baby Bunting operates 37 stores across Australia and targets parents-to-be, parents and friends of parents in the 0-3 age group. Its big sellers are prams, cots, nursery furniture and care safety items.
Baby Bunting soared 44 per cent on debut in August 2015. Its $1.40 issued shares hit a 52-week high of $3.21 in October after the company beat prospectus forecasts. The shares have fallen to $2.20, more because of profit taking than fundamental reasons.
Chart 1: Baby Bunting GroupSource: The Bull
I like Baby Bunting’s operational performance since listing and its long-term growth prospects. Sales in FY16 rose 31.4 per cent to $236.8 million – a result most retailers would kill for in a sluggish economy.
Store openings drove higher sales, but beneath the headline gains was strong organic growth. Comparable store sales for the period rose 12.5 per cent. That suggests Baby Bunting is attracting more customers, selling higher-margin goods and cross-selling more products. It also suggests the company is well managed.
Gross profit income rose 31.2 per cent as the company delivered efficiency gains. This is a tried-and-true retail formula: develop a strong concept, scale it by opening new stores, spread fixed costs and improve margins. When it works, profits – and share prices – can grow quickly.
Baby Bunting upgraded its potential store network to more than 80 and can comfortably open 4-8 stores a year for the next decade before saturation. The company estimates its addressable market is worth $2.3 billion, based on about 1 million children in that age category.
Baby Bunting just over twice as many stores as its nearest rival, Babies R Us Superstores (17 stores, at August 2016). The number-three player, Baby Bounce, has 15 stores but is not nationwide. Several mostly state-based baby-goods retailers, each with a few stores, follow.
The upshot is Baby Bunting has a big advantage over its nearest rivals, in a market with only a few large specialist competitors. The main threat is department stores that offer baby goods, but anecdotally they are losing more ground in this market to specialist players.
Online sales can become a bigger driver of Baby Bunting sales and a way to attract price-sensitive customers who might typically favour discount department stores. Online sales now account for 5.7 per cent of Baby Bunting’s total sales and are growing quickly.
Private labels are another growth driver for Baby Bunting and a reason why its margins can expand further. Selling more Baby Bunting-branded goods makes sense.
All of this gives Baby Bunting a powerful customer value proposition: prices that match those offered by larger department stores, and quality, trusted baby-goods advice.
Baby Bunting reminds me a little of JB Hi-Fi in its early days (albeit for a very different customer segement!) – a retailer that offered low prices, excellent service and advice, and was well-liked by customers. Few department stores can compete with that.
Baby Bunting’s excellent maiden result as a listed company and its good trading update in November reinforce the potential. The share price was due for a pullback or correction after exceptional post-listing gains. But the stock may have fallen too far in the last few months as fund managers rotate out of high-priced small-caps into undervalued large ones.
At $2.20, Baby Bunting trades on a Price Earnings (PE) multiple of 17 times FY18 earnings, based on a handful of broker forecasts. That does not seem excessive for a fast-growth retailer with a genuine competitive advantage, although care is always needed using consensus forecasts that have a low number of broker estimates.
Two of four brokers that cover Baby Bunting have a buy recommendation, one a hold and one has an underperform. A median share-price target of $3.12 suggests Baby Bunting is undervalued at the current price.
I am not as bullish, but believe the well-run Baby Bunting has been oversold at current prices and warrants further investigation for long-term investors who are comfortable with small-cap stocks with limited trading history as listed entities.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at December 15, 2016.