Margin pressures hit Baby Bunting’s half

Baby-Bunting-Store-facadeBaby Bunting has posted double-digit profit and earnings declines for the first-half of fiscal 18, weighed down by slower sales and investment in lower prices amid consolidation in the sector.

Delivering its interim result on Friday morning, the baby goods retailer said that net profit after tax had fallen 27.2 per cent on the prior corresponding period (PCP) to $4.2 million, while earnings before interest, tax, depreciation and amortisation had declined by 19.2 per cent to $8.4 million.

Total sales increased by 9.8 per cent to $148.3 million on the PCP as the business invested in price to maintain market share amid clearance activity following the administration of competitor Bubs Baby last year and store closures by Baby Bounce.

Comparable store sales for the six months to 31 December declined by 1.7 per cent on subdued trading in late November to mid-December.

“Trading conditions leading into Christmas were below our expectations,” CEO and managing director Matt Spencer told investors on Friday morning.

“The baby goods sector has been seeing consolidation and aggressive discounting, as some retailers exited the market and cleared stock while others sought to maintain market share,” Spencer added in a market release.

“Our pricing moved to meet these developments. Our customers can be assured that Baby Bunting provides excellent value and we won’t be beaten on price.”

Baby Bunting has reaffirmed its FY18 earnings guidance of around $23 million, outlining its expectation that the second-half will deliver around 4.5 per cent comparable store sales growth in the second-half.

Management had initially expected around 7 per cent comparable growth in the second-half, but has reigned in its expectations after booking 4.5 per cent comparable store sales growth in the first-six weeks of 2H18 trading.

“We’ve seen a positive reversal [of soft trading] in the second-half, but its appropriate to be cautious with same-store sales expectations given what we’ve seen,” Spencer said.

Resolved supply chain issues in the car, seat, baby carrier and toy categories, which negatively impacted earnings in the first-half, are expected to assist the business in achieving its earnings guidance despite tempered sales expectations.

Spencer remains confident that gross margin, which fell 127 basis points to 33.2 per cent in the first-half, will also improve moving into the full-year as competitive pressures stabilise. 

“We are seeing some signs that market conditions are stabilising. The recent trend of gross margin improvement is expected to continue into the second half because of some stabilisation of competition as well as internal initiatives that are producing results,” he said.

Amazon’s launch does not appear to have significantly impacted online sales, which grew 56 per cent over the PCP, now 8.4 per cent of total sales after significant investment in digital channels.

That will continue, with the forthcoming launch of a new gift registry app for shoppers to compound new customer relationship management and marketing automation platforms.

Spencer told investors that the impact Amazon would have on the business was not yet completely clear, but that initial reads on product signalled limited overlap.

“Our early read is that the product assortment sold by Amazon does not significantly overlap our own,” he said.

Baby Bunting’s every-day-low-price range also exhibited strength, with sales in the segment growing by 53 per cent, now representing 19 per cent of total sales

Private label and exclusive product sales, increased by 83 per cent and are now 18.4 per cent of total sales – reflecting management’s increasing focus on differentiation as new competitors enter the market.

Cost of doing business (CODB) during the first-half was $40.8 million, or 27.5 per cent of sales – reflecting new store investment costs of $3.2 million on the back of two new openings.

There were 44 stores in the big-box retailer’s network at 31 December, but one has opened in January ahead of a further 3 launches expected in the second-half.

Management said new stores are trading above expectation, particularly new regional stores, which it said is encouraging given around 50 per cent of future stores are slated for regional areas.

In Adelaide, where the company doubled the size of its store network in the first-half, total sales growth of 22 per cent was achieved, but this weighed on comparable growth as new stores cannibalised the performance of existing ones.

Excluding the impact of the Adelaide store openings, Baby Bunting said its comparable store sales growth was 0.2 per cent.

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