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

Thank you for standing by, and welcome to the Baby Bunting Group Limited HY '25 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Teperson, CEO. Please go ahead.

Good morning, everyone. My name is Mark Teperson, and I'm the CEO of Baby Bunting. Thank you for joining us today as we present Baby Bunting's first half results for FY '25. Darin Hoekman, Baby Bunting's CFO, is also here. We'll be going through the presentation that was lodged earlier today with the ASX, and there'll be time for questions at the end. The first half of FY '25 has been a step change for us. Our new strategy has stabilized the business and set us back on a growth trajectory. At the core of this strategy is our vision to be the best start for the brightest future. This articulates our intent to the market and helps customers understand why Baby Bunting should be their #1 choice in this space. Our mission is to support and inspire confident parenting from newborns to toddlers, and by delivering on this, we will drive sustainable growth for our shareholders. Moving to Slide 4. Our financial highlights demonstrate that our strategy is translating into earnings growth. For the first half of FY '25, pro forma NPAT was $4.8 million, up 37% on the prior period, with sales up 2.4% and comparable store growth at 2.2%. Gross margin increased 260 basis points to 39.8% and is tracking well towards our 40% target for this year. Cost of doing business is up on last year, largely reflecting our strategic investments and inflationary impacts on our operational labor. To counter this, we are undertaking initiatives that are seeking to address variable cost leverage. On the balance sheet, our net debt finished at $9.1 million for the period with ample covenant headroom available. Given our near-term growth focus, the board has determined not to pay a dividend. Looking at second half trading to date, the first 7 weeks has delivered a 2.8% comp sales growth results. Whilst moderated against what we achieved on Q2, this is on the back of changes to our promotional offer relative to the prior year, evidenced by strong margin improvement of 570 basis points. Our exclusive product launches continue to drive larger basket sizes and margin. A great example of this is the Maxi-Cosi Halo 360. This is the only fully rotational car seat in Australia at the moment, and it is exclusive to Baby Bunting. With a robust pipeline of new products landing in the second half, in addition to margin improvement initiatives, we reaffirm our FY '25 pro forma NPAT guidance of $9.5 million to $12.5 million. Moving to Slide 5. In the context of a challenging consumer environment, the successful execution of our strategy is delivering growth. Our focus on driving sales through range innovation and new customer acquisition is having an impact. Newness in our range continues to resonate with new customer acquisition up 12% on the prior period. We expect this momentum to continue into the second half. Alongside sales growth, we've also delivered margin expansion in a retail environment where margins are under pressure. During this half, in addition to more exclusive products, we took decisive actions, simplifying price architecture, renegotiating trading terms, and advancing supply chain initiatives, all driving our gross margin results. As we continue to pursue these initiatives in the second half, we remain confident in achieving our 40% gross margin target for the full year. For our retail media business, we'll also be completing the foundational work to scale it into FY '26. We're advancing our store network expansion and redesign. In the first half, we opened 2 new stores and relocated another. Our first major store format update in 17 years is underway with Maribyrnong set to reopen in April followed by 2 additional refits in the second half. We also expect to sign leases for 3 small-format stores shortly set to launch in early FY '26. Exclusive branded products remain a key traffic driver. We have a strong pipeline of exclusive launches and babywear private label expansion planned for 2H. We've seen a lot of newness launched recently. And in the first 7 weeks, PLEX, our private label and exclusive products represents 48.4% of total sales, up 330 basis points against the PCP. Our focus on building exclusive brand partnerships is a key enabler for our growth in this area. We have a long-term exclusive partnership with Nuna, one of the world's leading baby goods companies. We are the exclusive partner for Bugaboo in New Zealand, and we have recently signed a new 5-year Australian exclusive partnership with Edwards & Co, a great New Zealand brand known for innovative design in the travel category with prams and strollers. We believe we have a lot to offer brands in terms of our network, our platform and our reach, and this will be an area of ongoing focus for us. During the period, we completed a New Zealand supply chain and distribution network assessment, which identified approximately $1 million in annualized savings which we'll begin to see from Q4. In the second half, we'll be making further investments to grow brand awareness in New Zealand, reviewing our product range and refreshing our car seats and pram go-to-market strategy. And we also have a new store in Auckland opening in Q4 of FY '25, which will be in the new store format. I will now hand over to Darin to provide additional detail on our financials.

Thanks, Mark. We're on Slide 7, which provides more detail on the company's sales performance and some relevant drivers. Comparable store sales grew 2.2% and accelerated through the half from 0.6% in Q1 to 4.5% in Q2, highlighted by strong consumer activation through both the Black Friday and Boxing Day-related promotional events. Within these events and across the first half, as Mark has highlighted, range innovation has been a key growth driver with newness fueling sales momentum across our top 7 categories. Online sales, including click & collect, grew 2.8% year-on-year and now represent 22.4% of total sales. Pleasingly, since launch, our on-demand delivery partnership with Uber has been well received and has accounted for around 7% of all online delivery orders, lowering our net delivery costs and improving the customer experience. Marketplace GMV reached $2.5 million, up 184% year-on-year. Marketplace continues to be a capital-efficient incubator for new brands and categories, delivering strong early results in its first 12 months. Moving to Slide 8. As Mark mentioned, we are tracking well towards our 40% gross margin FY '25 target. In a challenging retail margin environment, we have delivered a 260 basis point improvement in margin through multiple initiatives, including improved supply trading terms, simplified pricing architecture, and lowering our supply chain fulfillment costs to both stores and our online customers. We have also been busy progressing opportunities in both private label and exclusive products, which will deliver both sales and gross margin benefit in the second half of FY '25 and beyond. Turning to the P&L on Slide 9. Again, we saw total sales of $254.4 million, up 2.4% compared to the PCP, and gross margin dollars grew 9.5% on the back of the margin initiatives just discussed. Our cost of doing business was $87.2 million for the half, up $5.4 million from the previous year. Store expenses have increased from the investment in 2 new stores added during the first half in addition to the annualization of the 4 stores opened for part of the prior year. Store sales, store wages, our biggest cost line increased 3.75%, in line with the annual Fair Work wage increase. We have invested in additional marketing to drive new customer acquisition and sales in a tight consumer environment. Our administrative cost increases reflect wage CPI and investment in our data and analytics capability platform. To counter these cost increases, management has been focused on countering inflation through multiple productivity initiatives across a number of fronts, specifically with a focus on lowering our variable cost base. Online fulfillment from all stores has improved our net labor productivity by 1.5% year-on-year as well as lowering the fulfillment cost by being closer to the customer, eliminating price beats on items less than $50 has significantly reduced call center traffic in addition to the margin benefits achieved. We've taken cost out of our tech infrastructure stack, with further initiatives planned to lower these costs through 2H and into FY '26. As part of our plans to return the business to 10% EBITDA, we want to deliver 200 basis points of leverage on our cost base. Driving asset and execution productivity will, therefore, continue to be a high priority for management. On to Slide 10. Our balance sheet reflects our continued focus on working capital management. In the first half, we achieved a $2.6 million reduction in comparable stores inventory, partially offset by a $1.6 million investment in new stores inventory. Our net debt balance stands at $9.1 million, an improvement of $4 million from June and with ample banking covenant headroom. Moving to the cash flow statement on Slide 11. Our cash conversion ratio of 63.1% is in line with our expectations. We've spoken about the gains we made in inventory productivity in the first half, which have been an ongoing focus and were delivered on the back of significant improvements made across the prior financial year. Investment expenditure for the half totaled $4.4 million, which includes investment in 2 new stores, design and preopening build costs in relation to the store refurbishment program, and ongoing operational, system and hardware infrastructure CapEx. In the second half, we expect our CapEx to be between $6 million and $9 million, fully funded from our operating cash flows. The board has decided no dividend will be paid as we prioritize the company's ongoing strategic investments and future growth initiatives. I'll now hand back to Mark to provide a strategy update.

Thanks, Darin. We're now on Slide 13. As a reminder, our growth strategy is focused on 3 key pillars: driving growth in our market share, our EBITDA, and our return on invested capital. We are committed to restoring confidence in Baby Bunting's long-term potential with clear initiatives to achieve a 10% EBITDA margin, including 500 basis points of gross margin expansion and generating 200 basis points of incremental headroom through network growth and enhanced productivity. Moving to Slide 15. Over the next 3 slides, we've provided our scorecard to showcase the progress against our growth strategy. Appreciating I've already covered a lot of this content, I'll speak through these slides quickly. Market share growth this half has been driven by the introduction of new brands, marketplace expansion, and the launch of Uber's same-day delivery. On Slide 16, EBITDA growth has been driven by gross margin gains, the launch of our retail media business and improvements in our New Zealand operations. These include renegotiated supplier terms, the introduction of dedicated New Zealand functions across marketing, merchandise and supply chain, and a comprehensive review of our supply chain and distribution network. Additionally, we have reshaped our core team structure to align with customer shopping behavior, enhancing operational efficiencies across the business. Over the page, we've increased return on invested capital through network expansion, including progressing 3 small-format deals, improving inventory productivity and reducing our aged stock. Now to Slide 18. We are confident in building on our strong momentum, driven by the effectiveness of our strategy. In the second half, we will continue to drive product innovation in our top-performing categories and elevate customer engagement through the launch of our Store of the Future, scaling on-demand delivery and advancing our loyalty initiatives. We are further investing in our team with a new learning management system which will be in place this half. We will help drive skills uplift and enhance our team's product knowledge, which supports the customer experience as we flow more new products across our key categories. I've spoken to our focus on exclusive brands and will increase our exclusive brand relationships in the future. These ensure great products and experiences for our customers and contribute to our gross margin objectives. To support earnings growth, we'll continue executing gross margin initiatives, optimizing freight and expanding brand awareness and go-to-market efforts in New Zealand. We'll also drive further operating leverage through freight efficiencies. Underpinned by a disciplined capital management framework, we'll open 3 refurbished stores, open 1 new store which will be in Auckland, complete the design phase for small-format stores and advance inventory efficiency initiatives. As we look to our future deliverables for FY '26, in addition to the annualization programs delivered in FY '25, we expect to add $2 million to $3 million of gross margin or around 50 basis points through our retail media business. We will deliver an annualized cost out in New Zealand of around $1 million. And for our network, we intend to refurbish 8 to 12 existing stores, target 5 to 8 new stores, and open 3 small-format pilot stores. We look forward to keeping you updated on our progress. Moving to Slide 19. One of our most transformative strategic initiatives is the Store of the Future, a game-changer in driving comp sales growth as we revitalize our store network. During the period, we finalized our Store of the Future design with the G Store, and our first refurbishment in Melbourne is underway. With 3 stores set to relaunch in the second half, we are bringing our vision to life at pace. Why does this matter? Because this new store design is the physical manifestation of our strategy where customers, team members, and partners experience the future of Baby Bunting in action. Our stores are experienced hubs where parents engage, learn and shop seamlessly. They are fulfillment powerhouses, driving omnichannel convenience and brand showcases, where partners launch innovation and inspire customers. By creating dynamic immersive spaces that elevate brand storytelling, we deepen our value to our partners and drive stronger connections with parents. At the same time, we are reinventing our internal service model, moving from a category-led layout to an activity-based design that better aligns with how parents shop. By designing the stores around different parenting activities like play, eat and travel, we will showcase more of our range and meet more of our customers' needs. This is an exciting opportunity to reimagine the customer experience and set a new industry benchmark, all while remaining self-funded through operating cash flows. I've touched on our strong trade leading into the second half of FY '25, and looking ahead, we're expecting our FY '25 pro forma impact to be in the range of $9.5 million to $12.5 million on the basis that comparable store sales growth will be in the range of 0% to 3%, our gross margin is at 40%, and cost of doing business increases, reflecting some wage inflation, higher store costs, additional roles and marketing to support our strategy execution. As we stated, our capital expenditure for FY '25 of $10 million to $13 million will be fully funded through operating cash flow. Comp sales have started the second half on plan, and we're confident of our gross margin target for the year. We'll continue to optimize our market-leading position through our new strategy, future-proofing our business, and delivering for our customers and investors. Thanks for your attendance this morning. We'll now open the line for questions.

[Operator Instructions] Your first question comes from James Bales from Morgan Stanley.

I guess, firstly, cost of doing business. You're making great progress on sales growth and gross margin improvement, but CODB has increased materially as a percentage of sales over the past few years. Do you see that as structurally higher and why? And then secondly, can you maybe rank the levers that you've got there to improve that?

Thanks, James. I'll take that one. So obviously, there's been significant wage inflation over the last 3 years, 3.75%. The prior year was 5.7%. The prior year to that, it was 4.5%. We have been rolling out new stores during this time, and they have been sort of elevating our -- the primary driver of the increase in the cost of doing business, and these have been contributing positive earnings. The challenge has been in the cost of business, deleverage has occurred through the existing store set through the decline in sales. And I think if you reflect on what Mark's talked about with regards to the strategy, these are the elements that are going to materially elevate cost of doing business leverage in the outlook. So refurbs and then beyond that, sort of further store rollout and potentially the small-format stores as well. In terms of what are we driving at, we talked about variable cost productivity. We did a cost-out in the head office 2 years ago. That's not something that we're contemplating but it is around lowering our variable cost, be it across the freight lines and all the other elements within the business that sort of move as we sort of transact with customers.

Okay, got it. And then maybe just on the comments on the 50 basis point gross margin improvement from retail media, can you just -- I just wanted to clear up the timing expectations there of the $2 million to $3 million.

James, that is for FY '26 as was outlined on the slide. So we have launched it this year in FY '25. What we've said is that we expect it to be earnings neutral in FY '25 as we scale the team and the operations that's required to drive that. But as we look to FY '26, our expectation is $2 million to $3 million.

Got it. And then maybe just 1 last one. New Zealand's pathway to breakeven, do you have any metrics in mind in terms of timing, required sales or store numbers to sort of help us understand the road map there?

Yes, absolutely. So we're targeting FY '27 for breakeven. A big step forward has been made with regards to the cost of doing business and the benefits that will start to sort of see flowing through from Q4 with regards to our supply chain. And then beyond that, we've got 2 of our stores running at breakeven at the moment at around $4 million of sales per annum. We need to get those 2 up to around $5 million, and then the other 2 stores that we've got running as well, they need to sort of elevate a little bit further than that. And then plus a couple of more stores of rollout and then we're there. There's also work that we're doing with regards to gross margin. So we have made gross margin gains in the first half year-on-year. So that's another stream of work. But I think that we -- with regards to the go-to-market in the second half, and Mark may want to comment on this, but I think we've got some good progress about to launch there as well.

Yes. So just to add to Darin's comments, this last half, we've really been focusing on making sure that the foundations in New Zealand are set right. So we've made some changes to our pram and our car seat go-to-market. In the fourth quarter, we will be launching a brand awareness campaign in addition to some retail marketing that will further drive and stimulate particularly in those categories. And that underpins the work that we've undertaken with our supply chain, as Darin mentioned, and then the margin improvements that we have been driving in Australia and New Zealand. About 80% of our COGS are supplied from Australia for our New Zealand business. So there is a slight time lag on margin flowing through the New Zealand business relative to Australia, as you would appreciate, weighted cost of inventory and then supply chain timelines. But we can see that starting to flow through into the New Zealand market.

Your next question comes from Sam Teeger from Citi.

Besides for the refurbs next year, which at $800,000 to $1 million per store, what are the major CapEx programs will you be doing in '26 and roughly how much you'll be spending on them?

Thanks, Sam. I'll take that one. I suppose the outside of new store rollout and we sort of named a range there as well, we will start the project on ERP and point-of-sale replacement. I don't think that we'll see the material component of that investment occur during FY '26. It's a 2-year project. So I think when we get a little bit closer, when we get to August, I think we'll be able to provide better clarity on that one. But that's really it. And then sort of what I like to refer to as sustenance CapEx is a number that sort of runs between $2 million to $4 million on a per annum basis just to sort of maintain the overall business' operations. So I mean, they are the key call-outs.

Basically, how you see it right now, you think CapEx in '26 is going to be quite a bit higher than '25?

Yes. Based on us achieving the targeted refurbishments and the new store rollout as we've described, there'll be a delta.

Okay. And just on the retail media opportunity, really exciting. Maybe if you could talk to us a bit more about it. And when you say $2 million to $3 million, are you referring to revenue or EBITDA? Or because it's super high margin, it does not really matter, it's the same thing? And will we see this more online and in-store just, the interest from suppliers to that?

Yes, thanks, Sam. So just to be clear on that, the $2 million to $3 million is as we think about it in relation to gross margin impact. And that's predominantly driven by the way in which we are bringing our extensive retail assets to market for our supply partners. That includes the use of our store and our store environments in addition to our digital assets and own channels like CRM, like our social channels and also our web and web assets.

[Operator Instructions] Our next question comes from Wei-Weng Chen from RBC Capital Markets.

Just a couple of earlier -- some kind of macro questions just to start off with. I guess, what are you seeing in terms of competition at the moment? And also in terms of the consumer, you're doing positive comp growth now but is that a better consumer or is that just a better -- is that just better retailing on your end?

Yes, so I might take those 2. So just as it relates to competition, the market has been relatively unchanged over the course of the last 12 to 18 months that I've certainly been in the chair. In a tight consumer market, providing value to customers remains the most critical element of connecting and making sure that you're maximizing opportunity. All competitors in the space are active in that environment. We've certainly been very active in that space but approached the necessity differently in terms of simplifying our price architecture to be clearer to our customers. And we've also worked very heavily on driving exclusivity in terms of newness and product innovation that's coming through. As it relates to the consumer and our results, the success of that program in driving new customer acquisition into the business has been the key differentiator because fundamentally, nothing in the macro environment has changed for young parents in terms of their affordability. So the work that we have done has really been off the back of driving extensive new customer acquisition and expansion and then driving increase and sales through the capacity of some customers who really do seek out new product innovation and have the capacity to spend.

Yes, that's helpful. And then just a question about cash conversion. So 63%, you said that, that was in line with plan. Wondering if you could share the plan for 2H and for the full year cash conversion. Yes, we'll, maybe start there.

Yes. Thanks, Wei-Weng. That's not something we're going to share. I suppose the clarification really is that in the prior year, we had a 120% cash conversion. There was a material reduction in our same-store inventory number of around $8 million over the course of the year and significantly in the first half. And so what you're seeing in the first half is a number that when we've performed well has been a number around this level. So we are certainly expecting to drive further inventory productivity through the second half. We're targeting another $2.5 million. We've got some high fixturing in store. We're going to sort of make a correction with regards to that. So we'll continue to work on it. But in terms of being specific around cash conversion, that's not something that we're going to provide a detailed update on at this stage.

Yes. And just a quick follow-up. Just wanted to understand, in all your responses there kind of related to more inventory, so it seems like it's more inventory-related, right? It's not at all related to sort of your renegotiated supplier terms or anything like that?

Well, actually, look, just reflecting a bit further. I can help you a little bit further. I mean, you can assume that our accounts payable number relative to inventory will be a relatively constant variation. We're opening one further store in the second half, and then I've referenced the inventory productivity that we've talked about. I mean, they're the key variables. We saw a moderate increase in our other assets in the first half. That was just in relation to the timing of prepayments and then also some other income that we received from the government in relation to a store relocation for one of our stores which was compulsorily acquired. So that's all the relevant detail.

There are no further questions at this time. I'll now hand back to Mr. Teperson for closing remarks.

Thanks. I just wanted to thank everybody for joining us today. We look forward to showcasing our new Store of the Future, which will open in April and updating the market later in the year. Thanks for joining us.

That does conclude our conference for today. Thank you for participating. You may now disconnect.