Baby Bunting shares drop after profit warning, hit by weak margins and December sales

Baby Bunting shares dive following the baby goods retailer’s profit warning after weaker than expected sales in December and a slide in margins.

Shares in Baby Bunting slumped by 12 per cent after it became the first retailer to disappoint investors in the lead-up to reporting season, with an underwhelming profit outlook for 2023 driven by weaker margins and a worse than expected trading over the key Christmas period.

In a trading update before the earnings season kicks off next month, Baby Bunting lifted the lid on trading for the last few months of calendar 2022 and it revealed — to the shock of investors — a disappointing Christmas and still weak profit margins at its baby products retail chain that will spill into the new year and spoil its full-year results.

Baby Bunting said it had tweaked its loyalty program, which last year was a source of poorer profit margins, however softer that anticipated sales in December and weaker margins through the December half had contributed to a 59 per cent slump in first-half profit with the retailer now expecting full-year pro forma profit to be in the range of $21.5m to $24m.

The weaker profit now expected for fiscal 2023 compares against a net profit of $19.5m for fiscal 2022 and pro forma profit of $29.6m.

Shares in Baby Bunting slid 12 per cent on the news and later closed down 35c, or 11.55 per cent, at $2.68. Baby Bunting had built itself a reputation of strong earnings growth but recent set backs and disappointing earnings has seen its share price collapse by almost 50 per cent over the last 12 months.

On Monday Baby Bunting, which has a market capitalisation of $365m, said although its margins started to improve in the second quarter and is expected to deliver benefits to the bottom line in the second half, the weaker profitability through the December half has squeezed profits.

Baby Bunting said in a trading update that its preliminary unaudited financial results for the first half showed a 59 per cent slide in profit to $5.1m with sales up 6.6 per cent to $254.9m. Gross profit for the December half was down 2.1 per cent to 37.2 per cent.

In terms of outlook for fiscal 2023 the retailer was more confident about its margins improving through the year, with a number of initiatives including changes to its loyalty program, to contribute to stronger profitability in the second half.

This weaker outlook reflects comparable store sales growth that ranges between negative low single digits and positive low single digits for the full year. The breadth of the range reflects a degree of uncertainty associated with consumer demand and behaviour, the retailer said.

Reflecting on the first half, with its results to be released to the market on February 17, chief executive Matt Spencer said Baby Bunting had lifted market share and improved same store sales by 0.4 per cent.

Sales were however below expectations towards the end of the quarter with weaker sales in December.

“Our core nursery categories, which are less discretionary such as car safety, prams and feeding, continued to perform well through the half and are an important part of Baby Bunting’s future growth and differentiates us from others in the market,” he said.

Margins were lifting, he added, but would take time to feed down to the bottom line.

“The gross profit margin deficit experienced in the first quarter improved in the second quarter driven by the execution of our recovery plans through the second quarter that will deliver further benefits into the second half of fiscal 2023.”

First quarter profit margin was down 230 basis points against the first quarter in the prior year driven by a number of factors. Since then, gross margin has improved from 36.4 per cent in the first quarter to 37.9 per cent in the second quarter, he said.

“Full year gross profit margin is now expected to be between 38 per cent and 39 per cent and ahead of last year in the second half.”

Baby Bunting boss Matt Spencer with baby Finn.