Is Baby Bunting worth $3.60 per share?

We examine the company’s recent preliminary FY20 results update as well as Citi’s Buy thesis on the stock.

The Baby Bunting (BBN) share price rallied over 11% on Tuesday, after the company released its preliminary, unaudited FY20 results to the market.

BBN last traded at $3.55 per share, some 50% higher than it did a mere three months ago.

Unaudited results at a glance

Looking at the highlights of the company’s ‘FY20 Financial Results Update’, on the top-line, the company said that it expected its full-year revenue to come in at around $405 million, representing a year-over-year increase of 12%. In that same period, online sales grew an impressive 39% and now account for 14.5% of the company’s total sales.

On the bottom-line, BBN expects to report pro forma earnings (EBITDA) of between $33-34 million, representing a growth rate of between 22-25%. By comparison, pro forma profits (NPAT) are expected to come in at between $18.5-19.5 million, representing a growth rate of between 29-35%.

Management noted that these results remain subject to audit and are yet to be finalised.

Regardless of that, Baby Bunting's Chief Executive Officer Matt Spencer rightfully described these as very positive results, given the current economic climate, saying: 'We have seen the business continue to grow in FY20 and I am confident that growth will continue in FY21.'

Mr Spencer added that BBN has continued to grow its market share over the last year, as well as achieve 'positive comparable store sales growth, gross margin improvement and retail cost leverage while also maintaining prudent working capital management resulting in Zero debt and $13 million in the bank.'

Baby Bunting is set to report its audited FY20 financial results on Friday, 14 August.

Citi analysts remain bullish on Baby Bunting share price outlook

In response to Baby Bunting's preliminary full-year update, Citi analysts raised their FY20 sales estimates by 1% – bringing them in line with the company’s latest guidance.

Overall, and in a recent note, analysts from Citi – who have been bullish on the stock for some time now – said:

‘We rate Baby Bunting Buy as it is well placed to drive medium term growth given the less discretionary product category, new growth opportunities in shopping centres and related baby services, and limited competition. Store rollout target upgrade could represent a short term share price catalyst.’

Citi currently has a price target of $3.60 per share on BBN, implying a sliver of upside from current price levels.

Looking forward, the investment bank is currently forecasting that the company will experience robust top and bottom-line growth upto FY22. Specifically, Citi expects BBN's revenue to grow from an expected $405.1 million in FY20 to $466.0 million in FY22; while earnings (EBIT) are expected to grow from $32.7 million to $47.0 million, between FY20 to FY22.

Elsewhere, some of the key risks identified by Citi include increased competition, particularly in the online space; the poor rollout of new stores; weakness in consumer trends; and adverse currency movements.

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