Baby Bunting’s formula to boost margins

The only national specialty baby retailer left standing, Baby Bunting says it has a significant opportunity to grow its store network and sales this fiscal year.

Speaking at wealth management firm Morgans’ conference in Queensland on Thursday, Baby Bunting CEO and managing director Matt Spencer confirmed the company’s full-year earnings forecast of $24-27 million EBITDA, up 30-45 per cent on the previous financial year.

This figure is based on Baby Bunting’s same-store sales growing in the mid to high single digits for the year, which depends on the retailer being able to capture market share from former competitors that have exited the market, such as Toys ‘R’ Us and Babies ‘R’ Us. It is also based on Baby Bunting’s gross margin exceeding 34 per cent and the opening on six new stores.

Spencer said the company’s gross margin is progressing in line with expectations, and noted that two new stores have already opened in Toowoomba, Queensland, and Chatswood, NSW, bringing the company’s total store count to 49.

Another five stores are in the pipeline to open this fiscal year, including a new format store at Melbourne’s Chadstone Shopping Centre due to open in December. The retailer is looking to reach at least 80 stores in future.

The significant price deflation that followed the collapse of Toys ‘R’ Us, Babies ‘R’ Us, Baby Bounce, Bubs and Baby Savings weighed on Baby Bunting’s margins and earnings in FY18, but the sector consolidation is now turning to the company’s advantage, and Spencer laid out a growth strategy centred around digital investment, supply chain savings and private label growth.

Store-to-door fulfilment hubs

On the digital front, Baby Bunting is in the process of replatforming its website, which is expected to deliver a better online customer experience when it is completed in late 2018. It has also invested in new marketing software to personalise and automate its communication with customers.

Spencer noted that the retailer’s click-and-collect offering is becoming more important to its e-commerce business, while new payment options, including Afterpay and zipPay, are gaining traction.

Behind-the-scenes, Baby Bunting has commissioned store-to-door fulfilment hubs to facilitate and reduce the cost of same-day delivery for online orders. Three state-based fulfilment hubs are planned for Hobart, Tasmania, Cannington, Western Australia, and Melbourne, Victoria, and are expected to be operational in FY19.

Private label sales to reach 50 per cent

Other supply chain changes expected to deliver cost savings include the transition of linehaul transport services to a new vendor, improved efficiency in the Dandenong South distribution centre and increased offshore direct sourcing.

Together with Baby Bunting’s growing private label sales, these cost savings are driving higher margins.

Private label and exclusive products currently represent 22.6 per cent of total sales and are on track to exceed 25 per cent of total sales in FY19. But long term, Spencer said the retailer expects half of total sales to be private label and exclusive products.

Baby Bunting has partnered with a creative agency to work on private label brand development and is looking to introduce additional lines.

The addition of relevant in-store store services and solutions could be the next step in the retailer’s revamped offering, following a strategic review.

Baby Bunting will provide a trading update at its annual general meeting on November 19.

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