Baby Bunting shares smashed on margin downgrade

Investors dump Baby Bunting following the maternity and baby goods retailer’s margin downgrade amid rising freight prices and other costs.

Shares in Baby Bunting slumped more than 20 per cent after the maternity and baby goods retailer slashed its profit margin guidance amid rising costs – as the momentum arising from the lifting of Covid-19 lockdowns slowed.

The group disclosed on Tuesday that it has suffered a 230 basis point slide in its profit margins caused by its input prices racing ahead of its ability to claw them back in higher shelf prices.

But the pinch to its margins wasn’t only linked to rising input costs with a slowdown in some baby categories and a more costly than expected loyalty program further squeezing its profitability over the first quarter.

One of the high-flyers through the Covid-19 pandemic after benefiting from a lift in the birthrate, the specialist retailer said it had seen a blow out in costs as the pandemic waned and competition in the sector picked up pace.

Addressing investors at the company’s annual meeting on Tuesday, Baby Bunting chief executive Matt Spencer provide an update that delivered both good news and bad news as robust sales growth was tempered by weakening profitability.

Mr Spencer said sales growth between July and October was 12 per cent, cycling 2.1 per cent this time last year and an uplift in total transactions of 15.2 per cent.

Comparable store growth was 7.6 per cent. The retailer said, for the first quarter, online sales represented 19.6 per cent of the total, down from 28.6 per cent in the previous corresponding period.

Investors dump Baby Bunting shares following the maternity and baby goods retailer’s margin downgrade, amid rising freight prices and other costs. Picture: Alison Paterson

However, first quarter margin performance had been below expectations as first quarter, gross profit margin was recorded at 37.2 per cent, down 230 basis points against the first quarter of 2022.

Shares in Baby Bunting – which had risen almost fourfold over the early years of the pandemic – slumped more than 25 per cent on the poor outlook. Baby Bunting shares closed down 80c, or 20.5 per cent, at $3.10.

The margin retreat was blamed on a number of factors, including the introduction of a loyalty program that cost more than expected, rising inflationary pressures and the fall in popularity and sales of some categories that were strong through the initial years of the pandemic.

“In the first quarter of 2023, we expected a minor year-on-year reduction in gross margin as a result of the loyalty program only commencing in November 2021 plus more products moving to Every Day Low Price. The amount of the actual reduction has been greater than anticipated,” Mr Spencer said.

“In tougher economic times, we continue to emphasise value in a competitive environment. We have maintained entry price points across our range ensuring great value every day, every visit.”

Baby Bunting posted a higher than expected hit to its margins of 60bp from the introduction of the loyalty program. The loyalty program had performed well, the retailer said, but resulting in higher than anticipated redemptions.

The retailer also struggled to lift prices in lock-step with its own rise in input costs. “We have experienced some unrecovered cost increases, where input costs have risen faster than retail prices. This has primarily been in the form of higher domestic freight charges and some foreign exchange movements,” Mr Spencer said.

The hit to its input costs included around 70bp flowing from higher domestic freight costs and 20bp from unfavourable foreign exchange movements.

Baby Bunting’s playgear department, which is around 5 per cent of sales, grew substantially during Covid-19, however, due to reduced demand in the category, there have been slowing sales against the prior year and heavier discounting in the market.

“For us, that has seen gross margin adversely impacted by circa $1m relative to last year.”

Mr Spencer told shareholders that its inventory levels were well-controlled and promotional calendar had remained consistent year-on-year. “We have plans in place to address the first half impacts outlined above to recover earnings over the full year.”

Baby Bunting plans to open a further five new stores this year, of which four will be in Australia.