Australian Store Oversaturation And Cost Pressures Will Curb Expansion

Key Takeaways

• Declining birth rates and increased supplier direct-to-consumer activity threaten long-term revenue growth and weaken market positioning for specialty retailers.
  
• Intensifying online competition, rising operational costs, and aggressive physical expansion may erode margins and reduce earnings quality over time.
  
• Store refurbishments, private label focus, omnichannel expansion, and new market and media initiatives position the company for sustained revenue growth and margin improvement.

Catalysts

Engages in the retail of maternity and baby goods in Australia and New Zealand.

• Declining birth rates across Australia and New Zealand over the medium and long term pose a structural headwind to demand for baby products, which threatens sustained revenue growth beyond the current expansion cycle and is likely to limit the scale advantage Baby Bunting can achieve as it grows its network.
  
• The aggressive expansion of global e-commerce platforms and large online retailers continues to intensify competition, which risks eroding Baby Bunting's market share and exerting downward pressure on both average selling prices and gross margins, despite near-term benefits from private label and exclusive product partnerships.
  
• Ongoing investment in expanding the physical store footprint, particularly in a maturing and potentially oversaturated domestic market, risks diminishing returns per store and lower revenue per square metre over time, which could dilute earnings quality as fixed costs outpace incremental sales growth and place strain on capital employed.
  
• Rising operational costs-including persistent wage inflation, higher rents, and increased logistics expenses-may continue to outpace productivity and supply chain efficiencies, pressuring operating margins and limiting the anticipated improvement in EBITDA and net profit margins across the business.
  
• The accelerating shift of key suppliers and brands toward direct-to-consumer channels and digital-first retailing reduces the competitive advantage and bargaining power of specialty retailers like Baby Bunting, increasing supply chain risk and threatening both top-line revenue growth and long-term gross margin sustainability.

Baby Bunting Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Baby Bunting Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Baby Bunting Group's revenue will grow by 10.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.8% today to 3.9% in 3 years time.
• The bearish analysts expect earnings to reach A$27.2 million (and earnings per share of A$0.19) by about August 2028, up from A$9.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 36.8x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.7%, as per the Simply Wall St company report.

Baby Bunting Group Future Earnings Per Share Growth

Risks

• The successful rollout of the Store of the Future program, which has consistently delivered an average 28% uplift in sales and a 40 basis point increase in gross margin over peer stores, indicates that store refurbishments could materially drive both revenue growth and margin expansion for years to come.
  
• The company's omnichannel strategy is demonstrating strong execution with a 10.8% annual growth in online sales, now representing over 23% of total sales, and innovative fulfillment partnerships such as Uber on-demand delivery, which helps expand customer reach and support sustained growth in topline revenue.
  
• Renewed focus on private label and exclusive brand partnerships, with these categories now comprising 47.1% of sales and benefiting from margin improvements, provides the business with enhanced differentiation and improved gross profit margins.
  
• The disciplined capital investment in new stores and refurbishments, backed by robust returns (return on funds employed at 12.1% and projected 50% ROIC for small-format stores), suggests ongoing expansion could support higher earnings and returns on equity over the long term.
  
• The New Zealand business, with 49% sales growth and a path to profitability by FY '27, coupled with the scalable retail media platform targeting $2 million to $3 million incremental profit contribution, represents new growth engines that can structurally increase revenue and net profit over time.

Valuation

• The assumed bearish price target for Baby Bunting Group is A$1.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Baby Bunting Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.0, and the most bearish reporting a price target of just A$1.8.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$696.2 million, earnings will come to A$27.2 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of A$2.6, the bearish analyst price target of A$1.8 is 44.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.