David Di Pilla-backed HMC Capital buys 10pc stake in retailer Baby Bunting

Retailer Baby Bunting has been a disappointment for years with a string of downgrades crashing its share price, but the David Di Pilla-backed HMC Capital sees potential.

A new BABY BUNTING store has come to Cairns and will open on December 22, 2021 at 37 Florence St, Parramatta Park. Picture: Alison Paterson

HMC Capital, led by former UBS banker David Di Pilla, has grabbed a 10.29 per cent stake in struggling nappies-to-prams retailer Baby Bunting, opening up a new corporate activist opportunity for the investment firm to match recently bought strategic stakes in companies such as Graincorp, Lend Lease and Sigma.

The shares in Baby Bunting were purchased through HMC’s $800m high conviction fund HMC Capital Partners, and gives the Di Pilla-backed investor a strong voice to the Baby Bunting board and management with it quickly emerging as the retailer’s second largest shareholder.

It is believed bankers and funds manager specialists within the growing HMC empire see plenty of potential and latent value within the Baby Bunting model, despite its recent string of profit downgrades and operational mishaps.

Of particular interest to the Di Pilla camp is what is seen by some as a poor rollout of Baby Bunting bricks and mortar stores, with HMC’s experience as being a landlord and property manager for big box retailers – derived partly from its purchase and revival of a portfolio of empty Masters hardware stores in 2017 – giving it great insight into the sector.

While Baby Bunting has developed a decent online presence, in keeping with the retail sector, HMC believes its physical presence is underwhelming with not enough stores, badly located stores and gaps in its network.

Baby Bunting currently has just over 70 stores through Australia, and recently opened its maiden store in New Zealand, with a target to have around 110 stores in its network.

The publicly listed HMC revealed late on Friday that it had been buying up Baby Bunting shares since March and had now amassed a 10.29 per cent stake worth around $20m. According to the latest annual report it would rank the HMC Capital Partners fund as its second largest shareholder, behind AustralianSuper, which has a 13.65 per cent stake. Also on the register is Bennelong Funds Management with 9.1 per cent and entities associated with US private equity giant KKR on 6.6 per cent.

David Di Pilla, managing director of HMC Capital. Picture: Jane Dempster

There has been some, limited, early engagement between HMC and Baby Bunting but that is expected to step up in the near future as the fund manager presents its strategy and suggestions to help rescue the Baby Bunting business and return it to a strong growth trajectory.

The current chairman of Baby Bunting is Melanie Wilson, the former head of online for Big W, and directors include veteran fashion executive Donna Player and Stephen Roche, who is currently a non-executive director of GWA Group, Myer Family Investments and a director of the Adelaide Football Club.

Founded in 1979 by Arnold and Gail Nadelman, Baby Bunting quickly grew to become Australia’s largest specialty retailer of baby goods, primarily catering to parents with children from newborn to three years old. To fuel its growth ambitions and commence its national rollout it took on new outside investors and in 2007 a consortium of private investors bought a majority stake from the Nadelman family, and that was soon followed by TDM Asset Management, which became Baby Bunting’s biggest shareholder in 2011 with a 42 per cent stake.

The retailer listed on the sharemarket in 2015, raising just over $50m with TDM retaining a 29.4 per cent stake.

While there was much excitement around the Baby Bunting IPO and its potential earnings the stock has disappointed investors for many years, issuing a string of profit downgrades, slashing its dividend and suffering a number of operational issues that dented earnings as well as investor confidence.

The stock traded as high as just under $6.60 amid the shopping boom of the first year of the Covid-19 pandemic, but it has steadily sunk since then – pummelled by massive selldowns following each profit downgrade – to be down almost 80 per cent from its highs in 2021.

Last week following yet another disappointing earnings update Baby Bunting shares collapsed 22 per cent, closing on Friday at $1.44. This most recent share price collapse gave HMC Capital Partners the opportunity to scoop up more shares.

Last month the HMC funds revealed its next potential corporate play and asset break-up, after announcing it had bought a 5 per cent stake in embattled grains handler Graincorp.

It also has large stakes in Lendlease and Ingenia, and is an investor in Sigma, which is currently proceeding with a merger with retailer Chemist Warehouse.