Baby Bunting (ASX: BBN) – Pt.1

Most Australian’s are familiar with Baby Bunting – Australia’s largest nursery retailer and one-stop-baby shop.

The current network of stores is 47 & the planned store network is double at 80+.

Noting the above, what’s does each new store mean for BBN’s future earnings?.. The 2016 prospectus highlighted the following:

  • In the first year of operation, the stores achieved average sales of $4.9 million and EBITDA of $0.3 million (6.4% EBITDA margin).
  • In year two, the stores achieved average sales of $5.6 million and average EBITDA of $0.5 million (8.4% EBITDA margin).
  • The Company’s existing stores which have been open for more than four years achieved average sales of $7.5 million and average EBITDA of $1.1 million in FY2015

In summary, a new store can potentially earn an ebitda of c.$1m. And with 35 new stores planned. That’s an extra $35m in ebitda. The current FY19 ebitda guidance is c.$25m. That’s a potential ebitda of $70m with a current market cap of $250m.

How will they achieve this roll out? Well… they have c.$7m in cash & $20m in undrawn facilities. And the total cap ex estimates for 35 stores is c.20m. See below from 2016 Prospectus;

  • Baby Bunting estimates that, on average, capital expenditure required to open a typical new store of approximately 1,500 square metres will be in the range of $0.5 million to $0.6 million.

The store roll out is supported by the closure of its competitor’s networks which makes execution more probable. The below competitors have closed down the following stores:

  • Toys R Us / Baby’s R Us – 45 stores
  • Baby Bounce – 13 stores
  • Bubs – 8 stores

The scope for new sites is far more achievable noting that the “local competitive environment” is a factor for site selection.

The competitors store closures has resulted in heavy discounting as competitors clear inventory with clearance sales which has impacted BBN’s FY18 profits.

Key Stats

  • Market Cap:     $256m
  • Net Profit:        $8.6m
  • Debt:                 $10.7m
  • Cash:                 $7.2m
  • Ebitda:              $18m
  • P/E:                     29x
  • Forward P/E     20x (estimates FY19 return to FY17 levels)

 

Equity

On a side note – the company has done well allocating its capital over the last 5 years when revenue growing $125m to $303m without reliance on outside capital.

The group’s capital in 2013 was $52m, and was unchanged until 2016 when capital was raised through the IPO with c.$25m added to the balance sheet via $18m new shares issued at $1.40.

Overall the IPO raised funds of c.$52m that was paid to existing shareholders. And not reinvested into the business with the exception of an $8m reduction in debt.

As of FY18 the groups issued capital is c.$85m

However, if we rely on the equity pre-IPO of c.$55. The returns on previously invested equity (i.e. FY19 earnings of c.$12m.) is 22%.

And the return on capital (+$8m debt) is c.19%.

I highlight this because; these are the expected returns to be achieved on future capital employed.

More to come.

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