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

Thank you for standing by, and welcome to the Baby Bunting Group Limited FY '26 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Teperson, CEO. Please go ahead.

Good morning, everyone. Welcome to Baby Bunting's FY '26 Full Year Results Conference Call. I'm Mark Teperson, CEO; and joining me today is Darin Hoekman, our CFO. We'll be going through the presentation that was lodged earlier today with the ASX, and there will be time for questions at the end. FY '26 has been a defining year for Baby Bunting. We delivered record sales, a record gross margin and pro forma NPAT growth of 33.9%. More than that, it was the year our strategy moved from proof of concept to scale. We're here to speak to the numbers, but before we do, it's worth reflecting on what sits behind them. The first years of life are formative. They shape confidence, security and curiosity in ways that last a lifetime. Anyone who has watched a child grow knows how quickly that window passes and how much it matters that parents feel supported while it's open. At Baby Bunting, our vision is clear: to give every child the best start in life so they can grow into their brightest future. That vision guides every decision we make from the products we curate to the way we design our stores and our mission to support and inspire confident parenting from newborn to toddler sits at the heart of our culture. And it's our team right across the business who bring this to life. This year, that took something extra. Behind this result sits 19 capital projects undertaken in a single year, 12 refurbishments, 3 new large-format stores, 3 small format pilots and a relocation, all delivered while continuing to trade the business and hold our service standards high. That is a remarkable effort, and I thank every member of our team for it. This alignment between purpose and performance is what underpins our results and the difference we make for families. Turning to Slide 6. Total sales of $556 million was up 6.5% on the prior year, with comp store sales growth of 3.5%. Gross margin of 41.2% was up 100 basis points and our second consecutive record, with the second half stronger again at 41.4%. EBITDA of $37.6 million or 6.8% of sales was up 140 basis points and pro forma NPAT of $16.1 million was up 33.9%. The balance sheet is in good shape. Net debt of $16.2 million with more than $60 million of undrawn headroom and cash conversion of 96%, up from 82% in the prior year. Our Store of the Future cohort delivered 18% sales growth against the prior year. We now have 15 refurbished stores open and trading with Melrose Park in South Australia reopening on the 8th of August after the balance date. So that's excluded from the growth calculation. Slide 7 sets that out in a 5-year context. 2 consecutive years of comp sales growth after 2 of decline, gross margin up 440 basis points in 2 years. EBITDA margin has more than doubled from 3.2% to 6.8% with cost of doing business leverage now also contributing to this metric. We are rebuilding earnings power, not just recovering it. Slide 8 sets out the operational progress behind those numbers. We undertook 12 Store of the Future refurbishments, opened 3 new large-format stores and continue to actively optimize the network, exiting one and relocating another. And we launched 3 Baby Bunting Junior small format pilots. On gross margin, new revenue -- sorry, on gross margin and new revenue, this was the first full year of Baby Bunting Media, generating $5.8 million of revenue. We signed an exclusive 3-year brand partnership with Stokke, a leading international children's brand, and we developed -- we deployed endless aisle across every store, giving customers our full online range from any location, and we scaled online delivery to 100% fulfillment from stores. And on operating leverage, we used existing store labor to service growing online demand. New Zealand overhead reduction is tracking to plan, and we strengthened the executive team, a GM of Merchandise and Planning, an Executive Head of Property and a GM of People and Culture, all recently commenced. Their details are in the annual report. I'll now hand over to Darin for the financials.

Thanks, Mark, and good morning, everybody. We're on Slide 10. Mark has already called out our headline sales performance. Looking across the year, as the macroeconomic environment tightened, we did see transaction values moderate slightly through the second half. Delays in new car seat range, our biggest category and a greater number of refurbishment-related store closure days also had an impact on the growth rate in the second half. Rotating car seats have been a significant innovation in the Australian market and an important growth driver for Baby Bunting over the last 12 months. Our planned expansion of this range was impacted by supplier delivery delays in the second half. This product has now started to land in FY '27, and we are seeing improving comps as a result. In addition to car seats, we also have a pipeline of new range landing in both prams and feeding with car safety, our largest categories. Of the 1,000 retail trading days lost due to refurbishment closures, 60% of these occurred in the second half. This had a net drag on the 2H comp of 0.5% relative to the first half. Broadening out the lens, our marketing investment and execution continue to drive our new customer acquisition, up 4.2% year-on-year. This is a very healthy metric in the context of the store closures I spoke about and bears well for future sales growth. Online sales continued to perform strongly, driven by the annualized benefit of launching same-day next-day delivery, endless aisle online shopping in stores that was launched in the second half and some website enhancements and improved traffic conversion across the year. Turning to Slide 11. Our gross margin improvement of 100 basis points to 41.2% had 2 primary drivers in PLEX expansion and Baby Bunting Media. PLEX is now 50.3% of sales and accelerating, noting it was 52.9% in the second half. This was achieved without any significant contribution from Stokke's stable of products, which started trading on an exclusive basis for Baby Bunting late in the fourth quarter. Baby Bunting's Media $5.8 million of revenue was up $2.5 million and contributed around 25 basis points of margin to the result. Turning to the P&L on Slide 12. We have already discussed sales and gross margin, which have been the material contributors to our improved profit performance in FY '26, in particular, in the second half of the year as we enjoyed the full benefit of the 9 refurbished stores trading for the half, and we cycled through some large one-off costs we incurred in the first half. Looking at CODB, where our material year-on-year cost investment related to the opening of the new stores, we were very pleased to achieve 30 basis points of leverage on last year. This was primarily delivered through the second half despite the lower sales growth profile. On our full year EBITDA of $37.6 million, this was achieved at a margin of 6.8%, up 140 basis points. EBITDA margin in the second half was 8.1%, up 280 basis points year-on-year. Below EBITDA, PP&E depreciation increased due to our Store of the Future investment program, which did include accelerated depreciation of around $2 million for the 12 refurbished stores and 2 stores closed during the year, Hornsby and Bentley. Profit after tax was $16.1 million, up 33.9%. Our second half profit grew 54% year-on-year. Slide 13. Cost of doing business leverage is a key pillar in our journey to achieving our targeted 10% EBITDA margin. It is great to report improvement in this metric delivered through sales growth plus improving execution efficiency. We absorbed 3.5% of inflation through labor productivity initiatives and lowered our warehouse expenses in New Zealand by close to $1 million through improved operational planning, which allowed us to contract our 3PL space requirements. Looking to FY '27, we will deliver a further cost out in the New Zealand supply chain. And whilst the fair work increase of 4.75% is significant, we are well progressed on plans to defray this cost increase. Moving to Slide 14. Our balance sheet is well funded to support the growth plan. Net debt finished at $16.2 million. During the year, we put in place a new $90 million facility with NAB, our long-term banking partner and extended this partnership out to September 2029. Our covenant headroom is meaningful. Our FCCR ratio improved to 1.9x, comfortably above the minimum of 1.5x, which infers EBITDA headroom of $17 million. Our leverage ratio came in at 0.7x against the ceiling of 2.5x, which leaves more than $60 million of debt headroom available. Our return on funds employed improved to 15.1%, up from 12.1%. Moving to the cash flow statement on Slide 15. Net operating cash flow of $36.2 million is up from $23 million with a cash conversion ratio of 96.4%. This result does include a year-on-year timing benefit on tax payable. And going forward, we expect to track back to our historical conversion ratio average of 80%. Capital expenditure of $44.5 million reflects the record 19 store projects undertaken. It also includes some additional investment on prepaid refurbishment items and replacement IT equipment that locked in some significant savings by purchasing early. This unscheduled cash flow pushed us above the top end of our $43 million CapEx range, but will help deliver lower store build costs in FY '27. Looking back at our 12 refurbishments, net of landlord contributions, these were executed at an average build cost of $1.7 million in the first half and $1.5 million in the second half. On capital management to support future growth, including the new store rollout and the refurbishment program, no final dividend will be paid. I'll now hand back to Mark for the strategy update.

Thanks, Darin. We're now on Slide 17. Baby Bunting is the leading specialist baby retailer in Australia and New Zealand, 80 stores serving a $6.3 billion market where the majority of spend remains outside the specialist channel. That is the opportunity. Our long-range plan establishes a 10% plus EBITDA margin business on the same 3 pillars we set out when we first announced our new strategy, that being how we grow our market share, doing this by extending our category leadership in hard goods, where we hold around 23% share and by winning share in a $3.4 billion soft goods market. We'll grow the network towards 120-plus large-format stores and by owning the parenting journey with the customer. Next, grow EBITDA. Critical to this is expanding gross margins beyond 43%, led by mix, retail media and offshore consolidation. We'll take PLEX to around 60% of sales and leverage the cost base as the fleet and systems scale. Finally, grow return on invested capital. This is about completing the transformation of our store fleet, backing the highest returning opportunities first and funding growth from operating cash flow. Slide 18 shows how the strategy compounds. There are 2 levers that improve the economics of every dollar, our gross margin and our operating leverage. On gross margin, we have upgraded our medium-term target by 100 basis points to a total improvement of 600 basis points. Note that this is measured of our FY '24 base. Further, we are starting to see positive inflection on our operating leverage after a period of capability investment and store-based productivity initiatives. Our 31.6% target represents an improvement of 290 basis points from our FY '26 result, where the material overhead leverage will come through continuing to grow the sales base. There are also 2 levers that grow the sales base, our refurbishment program and our network growth. Our refurbishment program still has another 60 stores remaining, targeting 15% to 25% growth and a sub-3-year payback. And our network growth program of an additional 43 large-format stores and potentially 37 small formats subject to the success of the pilot rounds out the material drivers of our sales growth strategy. That is the pathway back to a 10% plus EBITDA margin business. Our results delivered to date prove the strategy is working. The chart on the right-hand side illustrates this in action. Over the last 2 years, we have delivered 440 basis points of gross margin improvement and 12% sales growth. That has driven 136% improvement in EBITDA over that same period. Slide 19 sets out our focus areas for FY '27 against those same 3 objectives with the targets and deliverables for each. I'll take you through the deliverables underneath them. Moving to Slide 20. With our new store formats, exclusive ranges, expanded delivery options and digital experience, we are driving new customer acquisition and lifting lifetime value through more repeat purchasing. The chart on the right-hand side shows how the FY '27 comp growth range of 3% to 5% is built. The FY '26 refurbishment cohort annualizing is the largest contributor to this growth. Support also comes from continued online delivery growth and a modest contribution from the rest of the network, net of the drag from the FY '27 refurbishment closures. The range reflects the spread of outcomes across both formats and channels rather than a single point estimate. Over on Slide 21, PLEX, our private label and exclusive product underpins our differentiation and our margin expansion. You can see the relationship on the chart as PLEX has grown from 45.3% to 50.3%, total business gross margin has moved from 38.6% to 41.2%. In FY '26, we appointed a commercial manager for exclusive brands. And in the last few weeks, we've established a dedicated private label team by redeploying some of our existing merchandise team to drive at our goal of private label being 20% of total sales. I'm now on Slide 22. Range innovation and differentiation is very important, and it needs to be supported by availability. On innovation, the pipeline speaks for itself. We were the first to market with rotating car seats in Australia. We've just launched the Lacevo Infrared Light Therapy Breast Care, a world first. And excitingly, we have the Bugaboo and Stella McCartney collaboration exclusively coming soon. On availability, our Always Available program keeps top-selling products in stock across the network, and we're uplifting forecasting and replenishment planning to drive better in-stock rates on our core lines. That was a specific learning from the refurbishment stores, where demand ran ahead of our replenishment settings, and it is a direct sales opportunity for us in FY '27. Now on gross margin on Slide 23. The bridge on the left sets out how we have grown gross margin by 440 basis points from FY '24 to '26. Those actions are complete, so I won't walk through them again. What matters is the forward path. The step to 42% in FY '27 comes from initiatives already in progress. The full year benefit of Stokke, the offshore consolidation pilot now live with 2 suppliers and 5 more in discussion and growing Retail Media to 1.3% of sales. Beyond FY '27, we have also outlined the pathway to 43% plus, which builds upon the progress of these strategies underway. Let's now look at New Zealand on Slide 24. Our 5 stores and online delivered $19.1 million of sales, and we opened our first Store of the Future at Westgate in Auckland. This is a $1.1 billion market opportunity, and we have a network plan of 10-plus stores still to scale, where we can grow share while leveraging the cost base we already have. The drivers of the FY '27 results are set out on the slide. In short, we have a clear pathway to profitability in the second half of FY '27 and beyond. On Slide 25, 3 levers drive our operating leverage in FY '27. First is labor productivity. The fair work increase of 4.75% took effect on the 1st of July. We offset its impact through $2.2 million of productivity-led initiatives. Second, the introduction of offshore consolidation where big and bulky items shipped directly to our third-party logistics centers around Australia and then to stores, which reduces linehaul freight costs. This is worth $700,000 in FY '27 and $1.2 million annualized with more benefits to come in future periods as we onboard more suppliers. And third, artificial intelligence. We are still early in this journey with 2 frontiers of focus. The first is enterprise leverage, driving productivity and cost-out opportunities across the business. And the second is customer experience uplift. We are targeting 30 to 80 basis points of CODB leverage over the medium term with structured governance and a staged rollout proving value before scale. Over the page on Slide 26, the refurbishment program is the engine of this strategy. Average build costs moved from $1.7 million in the first half to $1.5 million in the second half of FY '26 through value engineering and execution efficiencies. In FY '27, we are targeting $1.4 million for A and B-grade stores. From FY '28, the refurbishment program will move to C and D-grade stores where we are targeting store builds of around $1 million with a new purpose-built redesign for that capital envelope. Refurbished stores delivered an 18% sales uplift in FY '26 with gross margin ahead of their peer stores and payback maintained at under 3 years. We plan 10 to 12 refurbishments in FY '27 with 5 to 6 in the first half. On small formats, in the second half, 2 of the pilot stores were EBITDA positive with the third one flat. We have decided to pause the rollout at this time while we continue to refine the pilot's performance. We'd rather get the model right for earnings growth than chase the store count in the short term. Slide 27 sets out where the rest of the capital goes. We have new stores. Average return on invested capital from new stores is strong. In FY '27, we will open 3 new large formats and relocate 1 large-format store. Then on digital, online sales have compounded at 19% CAGR over 8 years at a 20% plus EBITDA margin. We'll invest $1.5 million to $2 million per year to keep that going. And third, core systems. We've completed the assessment of our ERP and in-store systems and committed to an initial phase being general ledger replacement and data platform upgrade with $1.5 million of investment in FY '27. Slide 28 brings the funding picture together. In FY '26, there was $36.2 million of net operating cash flow, 96.4% cash conversion and more than $60 million of undrawn facility headroom. And importantly, FY '27 capital expenditure steps down to $33 million to $37 million against the pipeline of 13 to 15 store projects. We feel very comfortable with our existing funding capacity and with the trajectory of our current expenditure program. To close, let's move to the trading update on Slide 30. In the first 6 weeks of trade to the 9th of August, total sales growth was 6.1% and comparable sales growth was 4.3%. In Australia, we had comparable growth of 3.9%, cycling 3.7% in the prior year. Excluding 3 stores closed for refurbishment during the period, our underlying comparable growth was 5.5% and New Zealand continues to outperform, up 15%, cycling 13.9% last year. Focusing now on the outlook. The next scheduled trading update will be at the AGM on the 13th of October. Comparable store sales growth is expected to moderate, reflecting the ramp-up of the first half refurbishment program. This trend is expected to normalize once those stores reopen. Guidance for FY '27 is pro forma NPAT in the range of $19 million to $21 million, with an approximate 1/3, 2/3 earnings split across the year, consistent with our historical earnings profile. Our guidance assumes full year total sales of $585 million to $600 million with comparable store sales growth of 3% to 5%. Our guidance also assumes gross margin of 42% and capital expenditure of $33 million to $37 million, fully funded through operating cash flow. So, all up, we see another year of disciplined investment and growth as we continue to scale and build the business. We have great confidence in our strategy and a clear pathway to 10% plus EBITDA margin. Before we move to questions, I also wanted to acknowledge Darin. As announced in July, Darin will be leaving Baby Bunting in the coming months, and this is his final year results presentation after 12 years with the business. Darin has made an outstanding contribution over that time through periods of significant growth, change and transformation and has been a trusted leader of the finance function and a valuable member of the executive team. On behalf of the Board, the leadership team and everyone at Baby Bunting, I wanted to thank him sincerely for everything he has contributed and wish him well for the future. Thank you, everyone. I will now open the line for questions.

[Operator Instructions] Your first question comes from Sam Teeger with Citi.

What's our level of confidence that the FY '27 refurbs would deliver the same level of uplift and sales redirection compared to the ones we've done over FY '25 and '26? Is there anything different about this FY '27 cohort that we should take into account?

Thanks, Sam. No, there's no material difference in the store grades or the profile of stores that we have scheduled to refurbish in FY '27. As we called out in the comp update for the first 7 weeks, we've actually started the refurbishment program a little bit earlier than what we did last year, and that's a benefit as a result of us having a program on foot. But the program of the stores or the profile of the stores, there is nothing material to note that should suggest that it will be different at this stage.

Great. And how do the returns we're achieving on refurbishments compared to new stores? Conscious that there's only 3 new stores planned for FY '27. How much of this is a function of cash being diverted to the refurbs? And should we expect free cash flow in '27 to be negative again like '26?

I'll take that one. So, we're expecting positive free cash flow. The rollout of new stores is really around discipline on the quality of only taking up quality new store opportunities, Sam, as opposed to managing it relative to the store refurbishment pipeline. That's covered 2 elements.

I think the first question, Sam, was just the returns from the new format, new stores. And I think what's important to note there is that they're still very early on in their journey. I mean most of them only opened in the second half with a couple of months of trading. It's something that we will obviously continue to track, but the overall format performs well. We've been very pleased with the initial top line that we're seeing out of those stores.

Right. And just following on from that, Darin, is it becoming more difficult to find stores to open new stores, when you say driven by opportunities?

No. I mean we've got a healthy pipeline locked in for FY '28 and close to FY '29. Whilst the occupancy rates are high, Baby Bunting is a unique offer and landlords will always find ways, I think, to get our usage into their assets if and when the opportunities present themselves. So, I mean -- and that's been a consistent theme over a number of years now.

Okay. And then of those 3 stores planned for FY '27, how many would be in New Zealand? And then following on from that, given the success that we're having in New Zealand right now, why aren't we opening stores faster over there so we can move towards that longer-term target? I guess, that will help scale the business.

Well, I think we've been, again, very disciplined around our approach to New Zealand, and we've focused on optimizing the stores that we had live in the network and then bedding in our new Store of the Future in Westgate. So, we've only really reactivated the search into the New Zealand market recently. So that will mean rollout. At this stage, we don't have anything planned for FY '27. Something may come on to the horizon, but that would be late in the year, but that's only recommenced that sort of rollout. But on the basis of we're feeling really confident about what we're achieving there.

Your next question comes from James Bales with Morgan Stanley.

Just a question on the comp composition. So, these stores that you -- you've already refurbed and you're now cycling the refurb, how are they performing relative to the stores that are yet to be -- go through that refurb process?

Well, I can tell you that in the year-to-date comp numbers for the 3 that we opened in FY '25, 2 are moderately positive and one is flat. And what they're cycling is they're cycling high growth profiles from the prior year. So, we're very happy with that. I think that's in line, moderately below the rest of the network.

Yes. If you just -- James, it's a great question. But if you just consider that these stores were very early on into their openings this time last year to see low single-digit comp hold and flat in the third store, that is a tremendous, I think, achievement to have held the massive sales step change that we saw. So that's giving us good confidence that the durability of what we have built can endure into the second year cycle.

So, is that saying that you're confident that post refurb, the network should be -- should deliver positive or more positive durable comps?

Yes, effectively that. I mean we have said prior to facing into some of the macro challenges in the second half of FY '26, we had set targets of those stores being able to achieve around 4% comps on an ongoing basis in the second year. So, we've got 2 stores that are largely delivering that, 1 store is flat. We see that as a massive win, I suppose, in the current climate and against what we've seen.

Got it. And maybe a follow-up question just to sort of help with the modeling. In D&A, you talked about accelerated D&A in FY '26, bringing the number to $12.7 million. How should we think about the moving parts there in FY '27?

I think it's relatively -- it's going to be relatively consistent in that the only delta really is we closed 2 stores last year -- well, closed 1, relocated another in the first half of this year, we're relocating one. So that's really the only delta. And then you've got incrementing D&A from the refurbishment program from last year, and that will be in the order of $2 million to $3 million in the current financial year.

Okay. Got it. And then maybe one cheeky one. If you look at Slide 18, you've given gross margin long-term targets and operating leverage targets. Is that an upgrade to the long-term EBITDA margin guidance to 11.4%?

Well, we've always said that it would be a plus 10% EBITDA margin business, James. I think you can infer from the gross margin improvement that, that helps to perhaps lift above the 10% with the one thing to kind of factor in, which is the operating leverage really comes as a result of the refurbishments and continuing to grow the store network. So, the timing of it, that does have a determining factor in terms of time. But in terms of -- if you were to do the math and we executed everything, yes, your math that goes above 10% is right.

I might add, James, on that point is that when we launched the strategy and we talked about 42% gross margin in June '24, we hadn't really quantified the opportunity around offshore consolidation. We're getting a good read on that now. And then also, it's fair to say that we're really pleased with how our PLEX performance has been. And so that's also been very encouraging on the upside.

Got it. And maybe just one follow-up on that gross margin point. If -- I think your target on Retail Media was 2% of sales, you're about 1% this year. If you achieve that, doesn't that sort of already get you to the 27% target just from Retail Media?

Well, that's an aspirational target, James. We've got to prove to ourselves that we can do it. In FY '27, the target for us is 1.3%. That's still -- that's a great build and lift. But there's a runway of maturation of this business that we still need to get through. So, whilst I've always called out that if you look at mature tiers in the retail landscape, somewhere between 1% and 2% of sales is typically what a retailer has been able to achieve. So that's informed how we are thinking about the size of the opportunity, but we've got to prove that we can do it within our industry and with our partners.

Your next question comes from James Casey with Ord Minnett.

Mark, just following your comments earlier, Darin, thanks for your assistance over the last few years, very much appreciated. So, Darin, just could you give me some assistance on that CapEx figure of $33 million to $35 million this year? Can you just step through that in terms of the refurbs, the new stores and the IT spend, if that's okay?