On Tuesday, RBC Capital initiated coverage on Baby Bunting Group Ltd (BBN:AU), an Australian speciality nursery retailer, with a Sector Perform rating and a price target of AUD1.80. The company, which has been publicly listed since late 2015, has seen significant growth in its earnings before interest, taxes, depreciation, and amortization (EBITDA), increasing from AUD19 million in FY16 to AUD51 million in FY22, prior to the adoption of AASB16 accounting standards.
Despite this growth, Baby Bunting has faced headwinds due to tough macroeconomic conditions that have dampened customer demand. These challenges include competitive discounting and rising input costs. While the first half of 2024 showed signs of margin stabilization, the second half's like-for-like sales (LFLs) were negative, down by 3.2%.
The current economic climate, characterized by persistent inflation, has impacted Baby Bunting's performance over the past approximately 18 months. This backdrop, combined with the retailer's demonstrated sensitivity to these conditions, has led RBC Capital to adopt a cautious stance on the stock's outlook over the coming year.
In their coverage initiation, the firm cited the retailer's past growth but pointed out that recent market conditions have posed significant obstacles. The analyst noted that while the first half of 2024 showed some stabilization in margins, the outlook remains cautious due to continued negative like-for-like sales in the second half and the broader inflationary environment.
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