Baby Bunting Group Limited (BBN) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning. My name is Melanie Wilson. As your Chair, it is my pleasure to welcome you to Baby Bunting's Annual General Meeting for 2022. I'll begin today by acknowledging the traditional custodians throughout Australia and their connections to land, sea and the community. We pay our respects to their elders past through present and extend that respect to all Aboriginals and Torres Strait island -- Islander peoples today As the necessary quorum is present, I declare the Annual General Meeting of Shareholder is open. Today's meeting is the first time we've been able to get together in-person since 2019, and it's great to be able to see everyone in person again today. We're conducting the meeting with a virtual component. This hybrid format allows shareholders and proxies wherever they may be to attend virtually. All shareholders and proxies have the ability to ask questions and vote today. Online attendees can submit questions at any time. To ask a question, select the Q&A icon, type your question into the text box and once you finish typing, please hit the send button. Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on the same topic, amalgamated together. For those shareholders participating online and who wish to ask a verbal question, an audio question facility is available in this meeting. Please follow the instructions written below the broadcast. Finally, due to time constraints, we may not get to answer all of your questions. If this happens, we will answer them in due course via e-mail or posting responses on our website. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. At that time, if you are eligible to vote at this meeting, the vote icon and all resolutions will be activated with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You will receive a vote confirmation notification on your screen. You do, however, have the ability to change your vote up until the time I declare the voting close. For those holders here in the room with me today, you will have received a voting card upon registration. Please complete the reverse of the voting card. Should you require any assistance, we do have Computershare staff here available today. I now declare voting open on all items of business. Please submit your vote at any time I would like to know before I move to close the voting. I would like to now introduce my fellow directors and some of our management team. With me today, we have Gary Levin, Chair of our Audit and Risk Committee; Donna Player, a Member of our Remuneration and Nomination Committee; Gary Kent, the Chair of Remuneration and Nominations Committee. Gary is also on our Audit and Risk Committee, and he is seeking reelection today, and you'll have the opportunity to hear from -- a bit from Gary later; Fran Ereira, a Member of our Remuneration and Nominations Committee; and Stephen Roche, a Member of the Audit and Risk Committee. Also with me today are Matt Spencer, our CEO and Managing Director; Darin Hoekman, our Chief Financial Officer; and Corey Lewis, our Group General Counsel and Company Secretary. Finally, Tony Morse from our auditors Ernst and Young is also on the line. You will have had an opportunity to read the notice of meetings and accompanying explanatory notes. It was made available to all shareholders in September. I propose to take them as read. Before we move to consider the items of business, I wish to say a few words about [ 2020 ] financial year and the company's strategy. FY '22 was another year of growth change and progress for Baby Bunting. First of all, I'd like to take time to thank our wonderful Baby Bunting team members who have again worked incredibly hard this year. I also acknowledge the support of our suppliers and other partners. These are critical relationships with Baby Bunting, and we're grateful for their support. We are very aware that it's only with the support of our team and suppliers and of our shareholders that we are able to execute on our core purpose of supporting new and expecting parents. The company's first -- the company's strategy to grow market share remains the key focus. The 4 key elements are: first, investing in digital to deliver the best possible customer experience across all channels and enabling new business models; secondly, investing to grow in market share from our core business; thirdly, growth from new markets; and finally, to continue to pursue profit margin improvement. This strategy is underpinned by 4 pillars: building the best team; our logistics and supply chain capabilities; our IT and business processes; and leveraging data to drive insights and revenue. Baby Bunting's growth in sales and market share demonstrates that we're executing on this strategy. The progress that we have made in our transformational agenda also illustrates the investments that we're making to build the 4 pillars that underpin our strategy. You will hear a bit more about those in today's presentation. In FY '22, we continued to perform strongly and delivered another year of strong growth. We achieved sales of more than $0.5 billion for the first time, an increase of 8.3% on the prior year. Comparable store sales growth was 5%. I would remind you that our stores remained open throughout the COVID lockdowns and that our comparable store sales result is a true reflection of growth over the prior period. At the gross profit level, gross profit margin was up strongly on the prior year to finish at 38.6%. As we continue our investments in transformational projects and to support continued growth, our costs of doing business as a percentage of sale was up 85 basis points to 26.8% -- to 28.6%. However, at a retail level, leverage was achieved. We're also pleased that our EBITDA margin as a percentage of sales under the pre-AASB lease accounting standard measure reached 10%. This is a significant milestone for the company and a target that we set ourselves -- that we set for ourselves a number of years ago. This translated into a strong uplift in our group net profit after tax on a pro forma basis, which finished up 13.6% on the prior period to be $29.6 million. This result included our investments in New Zealand. When the Australian business is viewed on a stand-alone basis, it achieved pro forma net profit after tax that was 20% higher than the prior period. This was a very pleasing result as we continue to work through the various challenges that arose throughout the year. Matt will talk more about the FY '22 financial year shortly. For our shareholders, the company paid dividends of $0.156 per share fully franked for the year. This was up 10.6% from the prior year. Underpinning the company's strong financial performance, there are a number of significant operating highlights. We kept our team and customers safe, our 12-month rolling Lost Time Injury Frequency Rate finished under 10 for the second year in a row and ahead of the prior year. We opened 4 new stores, relocated 2 stores and refurbished a further 2 stores in the network. Our seller network is playing a very important role in our omnichannel offering with 48% of all online deliveries processed through our stores. This means that the orders can be fulfilled more quickly and closer to the customer, improving our customers' experience. Our private label and exclusive product strategy goes from strength to strength, with more than 45% of sales coming from private label and exclusive products. Of these, 37.1% relate to exclusive national brand products, an increase of 16% year-on-year. The other 8.2% of sales comes through our own private label brands; 4Baby, JENGO and Bilbi. This was a growth of 31.5% year-on-year. Best Buy product sales or items that are part of our everyday low price range made up 37.7% of sales. In the current financial year, we have further expanded our Best Buy range to continue to provide great value for our customers. In his comments, Matt will expand a bit more on our ongoing commitment to value. We launched our new loyalty program, Baby Bunting family during the year. This is an omnichannel loyalty program that offers members a range of rewards and benefits. Also during the year, we deployed a new headless digital architecture, including a new website for both Australia and New Zealand to complement our store network. In New Zealand, while COVID-19 travel restrictions presented some challenges, we were very pleased to open our first overseas store in Auckland in August 2022. We also established a distribution center to support online fulfillment and our future New Zealand store network. And finally, the 2022 financial year saw the first full year of operations of our National Distribution Center. It commenced operations in March 2021 and the expanded size of our DC means that we have been able to generate greater efficiencies in relation to stock movements, which is providing gross margin benefits. The team has done a great job across a range of products and initiatives. Matt will speak to some of those in more detail later. Baby Bunting released our second sustainability report in August, and I would encourage all shareholders to read it. It has details on some of the great work that is underway. We have adopted an ESG strategy that is based around 3 pillars: our people, our communities and our planet. During the year, we made some progress on some key initiatives. In terms of our people, we improved safety with a further reduction in our Lost Time Injury Frequency Rate. We made great project -- progress in gender diversity goals, a point I will return to later. We expanded our paid parental leave policy to provide greater support for our team members who are primary caregivers for new members of their family. And we have around half of our -- of all of our team members who are shareholders. The Board has chosen to again make offers under the company's Employee Shift -- Gift Share plan. This is the eighth year in a row where we have made offers under that plan, providing eligible team members around $1,000 of Baby Bunting shares for free. In terms of our communities, we've made further progress on our long-term goal of raising $10 million to support our communities. We raised $700,000 to support families through partnerships with PANDA and Life's Little Treasures Foundations. These are both organizations that provide essential support to parents who are experiencing great challenges. We opened the Wen Huang Product Testing Room at our support center, and we continue to invest in partnerships with organizations committed to infant safety, including INPAA. And we will be a supportive partner for them in the upcoming Baby Safety Month in November. In terms of our planet, we commenced our journey to net-zero emissions. Our estimated Scope 2 emissions were 4% lower than in the prior period, and 11% of our energy came from renewable sources, a number that we will increase over the coming years. We will shortly convert our first store to having rooftop solar power. And we are currently phasing out plastic bags across our stores in this financial year. Baby Bunting has a gender diversity target that looks to have women make up 50% of -- across all levels of the company by 2030. As the slide shows, we have strong levels of representation across the Board. There have been some recent comments made about women and Baby Bunting senior ranks with some reports claiming that there are no women at this level. This is not correct. At the senior executive level, 3 out of the 12 executives are women, including 2 line positions being our General Manager of Merchandise, Sarah Serle, and our General Manager of Marketing, Sue Dawson. I'm confident that we will achieve our target of having 50% of women across the group in the future. Over the last 5 to 6 years, Baby Bunting has established itself as Australia's leading baby goods retailer. We believe there are significant growth opportunities available for Baby Bunting over the next few years and will provide the basis for even further more growth. We have updated our store network plan and are targeting a network plan of 120 stores across Australia and New Zealand. Our current addressable market sits at $2.5 billion. We believe that we can define our total addressable market to be more like $3.5 billion. This will be driven by range and product expansion and facilitated by our online channel and the new Baby Bunting marketplace. We have the leading specialty nursery website, and we see the opportunity to implement Australia's largest and most comprehensive baby or nursery marketplace to support new and expectant parents with all their needs in one location. We plan on doing this by leveraging our 20 -- sorry, our 32 million-plus website visitations to bring together a marketplace that will showcase more products, more brands, more suppliers and ultimately give parents and parents to be more choice through their parenting journey. We see opportunities to leverage our loyalty program further to deliver growth. By focusing on these growth opportunities, we are laying the foundations to support further growth in profitability and shareholder returns, while we're also providing a great experience for our customers and more opportunities for our supplier partners. We believe there are exciting times ahead for many years to come. Later in the meeting, shareholders will have the opportunity to vote on the adoption of the company's remuneration report and the approval of a grant to the CEO and Managing Director, under the company's long-term incentive schemes. There have been no material changes in respect to these matters. The Board is continuing its approach to further reduce the number of rights outstanding to be below 5% of issued capital, while still providing appropriate incentives that are aligned to long-term growth in earnings and shareholder returns. Shareholders will also have the opportunity to vote on the reelection of Gary Kent. Gary is retiring by rotation and will address shareholders later in this meeting. To close, I want to thank again all our team members in all our stores, our Australian and New Zealand distribution centers and our Store Support Center, who will contribute to Baby Bunting's purpose of supporting new and expectant parents. They have a lot to be proud of. I will now invite Matt Spencer to provide a bit more detail on FY '22. He will also provide a year-to-date trading -- an update on year-to-date trading performance.

Thank you, Mel, and good morning, everyone. It's great to be standing up in front of our shareholders again after being lockdown during the last 2 years. I also welcome those participating via the online platform. As Melanie mentioned, building the best team is one of the pillars that underpins Baby Bunting's strategy. We have put together a great team over the last few years, bringing new talent as the business has expanded and progressed along its journey. Collectively, the executive team has over 70 years' experience working at Baby Bunting. Scott Teal, our Chief Operating Officer, manages the day-to-day trading performance across all channels, which include store operations, online, merchandise and supply chain. The general managers in the operational teams are Sarah Serle, who heads our merchandise team, Michael Pane, who leads store operations, Rod Williams, who's in charge of digital and online and Marcus Robinson, who is responsible for supply chain. Collectively, they have a very broad range of retailing experience, having careers that have seen them accumulate many years of experience, both here and oversees. Our operations team supported by the key executives with Sue Dawson, our GM of Marketing and Sharyn Murray, GM of People and Culture. The team is rounded out by Matt Rodda, who's GM of IT and Transformation; and Stuart Chard who is the Executive General Manager of Strategy; and of course, Corey Lewis, who in addition to being our Group Legal Counsel and Company Secretary, also has responsibility for product -- the Product Compliance Team. I'm very, very proud of our team and what it has achieved in FY '22. We started the year with lockdowns occurring throughout Australia and with significant lockdowns in Melbourne and Sydney. Various other issues of supply chains and the ongoing impact of COVID-19 meant that the FY '22 financial year was yet another year of challenges. Nevertheless, the team executed on our plans, and we continue to build out the opportunities ahead of us. Melanie has already talked to the financial highlights for the past year and the key callouts being market share growth of sales of $507 million, up 8.3% on the prior year. Gross margin dollars are up 12.7% with gross profit percent up 151 basis points to be 38.6% for the full year and deleveraging and our cost of doing business metric, which finished at 28.6% of sales, which reflected the impact of the new DC and the investment in New Zealand. Resulting in a pro forma EBITDA of 16.1% or $50.5 million on a pre-AASB 16 basis. And on this measure, we have achieved our long-term ambition of being a 10% EBITDA margin business. During the year, we worked hard to lay the foundations for our store network in New Zealand. And shortly after year-end, we were excited to open our first store in Albany in Auckland. Whilst it took a bit longer than anticipated and primarily due to COVID restrictions. This store is now open and is very -- that has been very, very well received in the market. We're anticipating opening our second store in [indiscernible] FY '23. Now that potential landlords have seen the strength of our retail offering, we are working on a number of new deals, which will help us achieve our network plan of 10-plus stores in New Zealand. We've made significant investment in customer research, brand awareness campaigns and recruitment of local talent to bring a tailored New Zealand offer for New Zealanders by New Zealanders. During FY '22, we made investments of around $1.5 million in one-off saving costs. In FY '23, a further $400,000 investment to finalize the setup costs for New Zealand. Our strategy in New Zealand is to sell the widest range of products backed by great service at low prices every day. Our Transformation Program was defined back in FY '18, is made up of a number of large investments to overhaul or modernize the business across our systems infrastructure, brand and supply chain. To date, the program is well progressed and already delivering value, notwithstanding it has taken longer than anticipated and largely as a result of COVID and the delay we experienced in launching the new website, which pushed some projects back by up to 2 years. In FY '22, launching loyalty and our new online tech stack were big milestones for the business. Since our last update to shareholders in August, we have successfully launched our new payroll system with works well progressed in Advanced Order Management and time and attendance systems, which all will complete in FY '23. As flagged in our August update, we also plan to complete the implementation of a new ERP and point-of-sale systems in FY '23. As also highlighted, we elected to defer further progress on these 2 projects to instead prioritize our work on the Baby Bunting marketplace, which is a significant growth opportunity for us. We are focused on delivering growth in uncertain times, and our priorities for FY '23 include the following. We will continue to pursue market share growth through our expanding offer as well as through the expansion of our store network and online presence. We are committed to restoring gross margin performance in a high inflation environment, and I'll talk about that in more detail a little bit later. We will continue to work through our Transformation Program. And as I described earlier, it is beginning to approach completion. We're working to launch the Baby Bunting Marketplace in the second half of FY '23. The current focus is on continuing to expand the products available online with the current year goal of exceeding the range of products available in our physical stores. We're expanding our everyday low price or Best Buy program to include more products, and I'll again have more to say about that later. We aim to continue to invest in our private label and exclusive product ranges. And in relation to loyalty, we will be working further to harness the benefits of our new loyalty program which is pleasingly performing well beyond our anticipated level of customer engagement. And finally, we have plans to open 8 new stores. To date, we already opened Burnside here in Melbourne, and Hornsby in Sydney, and in Albany in New Zealand. As Melanie mentioned, Baby Bunting has identified a number of future market share growth opportunity, and I'll expand on a few of them now. The Baby Bunting Marketplace. We have set ourselves a goal of introducing Australia's most comprehensive specialty marketplace for baby products. We are planning to build on the proposition of the one stop baby shop, leveraging our 32 million-plus website visitations to bring together a curated marketplace that will showcase more products, more brands and more suppliers and ultimately give parents and parents to be more choice through their parenting journey. We see the marketplace as an ideal way to grow existing categories and grow our market share of our expanded total addressable market. We'll do this via first-party suppliers, both existing and new suppliers and drop-ship capabilities. We will also be introducing by invitation third-party suppliers to sell a curated range of products. Our dedicated project team is working on the technical platform with our solution partner. And we're building out the offering and have initiated discussions with potential suppliers. We are expecting to launch Baby Bunting Marketplace in the second half of FY '23. Turning towards the expanded addressable market. The pandemic has impacted retail in many ways, but positively, it has accelerated the growth of the majority of the transition to online shopping and the omnichannel experience. In Australia, renowned levels and experiencing -- renowned levels and experience consistent with other markets in the baby category is no different. Many categories such as car seats, prams, cots and furniture lend themselves to a more tactile in-store and omnichannel offer. And categories such as toys, apparel, soft goods and feeding have seen a growth online. Traditionally, our ranges have been governed by this store footprint or format and the associated shelf space. We have historically identified the total overall baby goods market at around $5.2 billion. Of that, the total addressable market Baby Bunting based in our store format and offer has been $2.5 billion. Our analysis has highlighted that within the overall market, the online channel for certain categories of product has expanded significantly. With our significant investment in our digital platforms and our National Distribution Center, we are now in a position to be able to expand our online offer, and therefore, contemplate a significantly larger addressable market. For example, we estimate the online channel for baby wear has grown from $130 million to $370 million in recent years. This traditionally has not been a product category that we have supported in our online offer. Alongside our expansion of our online offer, the introduction of the marketplace provides us with a platform to broaden our offer of first-party products by drop ship capability. It also presents the opportunity for third-party suppliers to leverage our online traffic to sell differentiated products and hence, broaden our range and ultimately, the total addressable market for Baby Bunting. This is yet another reason again why babybunting.com.au will continue to be the one stop baby shop. Given these factors, we believe that we can redefine our total addressable market in Australia to be $3.5 billion, out of a larger total market. We have always been committed to providing value for our customers. With the economic outlook becoming more challenging, we are working hard to lower the cost of parenting. We're expanding the number of products included as part of our Best Buy where everyday low price range. We have recently expanded Best Buy to include our core range of cots and furniture and carriers. Best Buy sales now make up over 50% of sales year-to-date, up from 37.7% in FY '22. We remain committed to our 5% price we promised, and we are reinvesting supply chain efficiencies that we generate into price. We're continuing our investment in private label and exclusive products. And they now make up over 45% of sales year-to-date. Our investment in value will ensure that customers can have confidence when shopping with Baby Bunting. Before I hand back to Melanie, I'd like to give you an insight into trading since we last reached the market on 12th of August this year. Year-to-date, total sales growth is 12%, so I think, 2.1% this time last year. And we have seen an uplift in total transactions of 15.2%. Comparable store sales growth is 7.6%, and we remain focused on our strategy to grow market share. Our first quarter margin performance has been below our expectations, although I do note that the first quarter is our smallest period of earnings. There are a few elements affecting our first quarter gross margin performance. Over the last few years, we have made significant gross margin gains. However, in the first quarter, gross margin was 37.2%, which is down 230 basis points against the first quarter of FY '22. In Q1 FY '23, 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 everyday low price. The amount of the actual reduction has been greater than anticipated. In tougher economic times, we continue to emphasize value in a competitive environment. We have maintained entry price points across our range, ensuring great value every day and every visit. During the quarter, we have seen some competitors discounting top-selling items to drive sales. Our 5% price promise is a key part of our response to this and it means we will not be beaten on price. There have been a few other drivers of our gross margin performance in the first quarter. We 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 FX movements. Our [indiscernible] which is around 5% of our sales, grew substantially during COVID. However, due to reduced demand in this category, there has been slowing sales against the prior year and heavier discounting in the market. And for us, that has seen gross margin adversely impacted by around $1 million relative to last year. We have been delighted by the uptake of our Baby Bunting family loyalty program, which has been extremely popular. Our customers are redeeming the rewards they earn in subsequent purchases with us at a higher rate than anticipated. This has had a decretive effect on gross margin by circa 60 basis points, more than we had expected. This margin reduction effect is quarantined mostly to the first quarter as we cycle the introduction of our new loyalty program in November 2021. We reiterate that our inventory levels are well controlled and our promotional calendar has remained consistent year-on-year. We have plans in place to address the first pool -- the first half impact outlined above to recover earnings over the full year. We anticipate opening 8 new stores in the year. We have plans for 6 new stores in Australia, which includes new stores already opened at Burnside and Melbourne and Hornsby in Sydney. We've also relocated our Ringwood store to a new more convenient location at Eastland. In New Zealand, in addition to our new store Albany, Auckland, we expect to open a store in Christchurch later in the year. Given the continuing economic uncertainty, inflationary pressures and other global challenges, we will not be providing any further guidance about FY '23 earnings at this time. In conclusion, I would like to thank our team, our customers and of course, our investors for their support during the year. Thank you for your support and attendance today, and I'll now pass you back to the Chair. Thank you, Melanie.

Thank you Matt. Okay. The business will be conducted in the following manner. The proposed resolutions will be displayed on the screen at the appropriate time. After each proposed resolution has been put to the meeting, questions have been -- that have been submitted by shareholders and proxies and are relevant to the items will be considered. After questions and comments on each proposed resolution, I will disclose the proxy position for that resolution. As I noted at the outset, voting today will be conducted by poll. The results of the poll will be announced to the ASX as soon as they are available, and they'll also be posted on the Baby Bunting website. Christina Piccolo of Computershare has agreed to act as Returning Officer, I now appoint her. Okay. We'll move to the first item of business. The first item relates to receiving and considering the company's annual -- the company's accounts and reports. Before I invite further questions from shareholders, I will address some of the questions that we received in advance of this meeting. The first question asked whether Baby Bunting ad its suppliers have done any research into the impact on the increase of electric cars in car seats -- in children's car seats. It's an interesting question because quite a few of us actually do have electric vehicles now. Baby Bunting sells children's car seats, and we also install them. And our installation business has been growing strongly over the last few years as people seek the assurance of having their car seats installed by accredited installers. While we are seeing more electric vehicles as part of our installation operations, we do not anticipate any change in the need for car seats as more electric vehicles hit the road. The other question that we received is whether the company would consider introducing a dividend reinvestment plan, including one where shares are purchased on the market for participants. To date, the company has funded our growth through our existing operations. Nevertheless, we can look at the cost of providing a DRP to shareholders and one that does not involve the issue of new shares. And we will look to see if this is something that we can do. I will now invite further questions from shareholders on this item. Are any shareholders in the room with questions?

There are no questions online.

No questions online. Okay. All right. As there appears to be no further questions on the reports, I conclude -- I now conclude the discussion on this item. Item #2. This item relates to the reelection of Gary Kent. Gary was first appointed a Director in December 2018. He is the Chair of our Remunerations and Nominations Committee and also a member of our Audit and Risk Committee. Gary, would you like to come forward and address the meeting?

Thank you, Mel, and good morning, everybody. It's been a privilege to be on the Board since 2018, and there's been tremendous opportunities for the organization. And you can see from today's results the growth over those years, both in sales and number of stores and profitability has been tremendous. If I'm reelected, I'll be committed to representing shareholders, but also our community, our people and the planet and make sure we have the resources, processes and the people to take advantage of the opportunities ahead of us, which are many. But also for the challenges that are ahead of us and management teams done that extremely well, particularly the last couple of years, and we need to make sure that we have the capability to continue that sort of performance. So thank you for today. And hopefully, look forward to representing you again over the next few years.

Great. Thank you, Gary. I will now put for the motion that Gary Kent be reelected as a director. Are there any questions on this item?

No Chair. No questions.