Baby Bunting Group Limited (BBN) Earnings Call Transcript

Ladies and gentlemen, good morning. My name is Stephen Roche. As your chair, it's my pleasure to welcome you to Baby Bunting's Annual General Meeting for 2026. As the necessary quorum is present, I declare this Annual General Meeting of Shareholders open. When you came in this morning, you were given an admission card. Shareholders and proxyholders have been given blue cards, Nonvoting shareholders have been given yellow cards, meaning they can ask questions not vote. Visitors have received white cards. Only shareholders and proxyholders may ask questions and speak to resolutions. Today's meeting is also being made available online. Shareholders watching online have the ability to submit questions for the meeting. At each item of business, I will respond to questions from the floor first, and then we'll address written questions. To ask a question in writing on the meeting platform, select the Q&A icon, then select the topic your question relates to, type your question into the chat box at the bottom of the screen and press send. To help facilitate the orderly running of the meeting, if you have a written question, we encourage you to lodge it now. There is no need to wait until that particular item of business is being considered to lodge a written question. Now let me introduce you to my fellow directors and some of our management team. With me today, we have Gary Kent, the Chair of our Audit and Risk Committee; Fran Arera, a member of our People, Culture and Remuneration Committee; Deborah Singh, who chairs People, Culture and Remuneration Committee. Dona Player, a member of our People, Culture and Remuneration Committee, and Richard Vincent, who joined the Board in September and is a member of the Audit and Risk Committee; and last but by no means least, Gary Levin as shareholders would know, Gary became a director in 2014 in advance of Baby Bunting's IPO and today is appointing day as we farewell Gary at the end of this meeting. Also with me today are Mark Teperson, our Chief Executive Officer; Darren Hockman, our Chief Financial Officer; and Corey Lewis, our Chief Legal Officer and Company Secretary. Finally, Katie Struthers from our auditors, Ernst & Young, is also present. You will have had an opportunity to read the Notice of Meeting and accompanying explanatory notes. It was made available to all shareholders in September, and I do propose to take them as read. However, before we move to consider the items of business, I propose to make a few comments. In relation to FY '26, it was a year that saw a significant progress as we moved from proof of concept of our Store of the Future program to delivering benefits at scale. We achieved record sales of $556 million, up 6.5% and a second consecutive record gross margin of 41.2%. Pro forma net profit after tax grew 33.9% to $16.1 million and profit growth accelerated through the year with second half pro forma net profit up some 54% on the prior corresponding period. This reflects the benefits of our gross margin initiatives refurbished stores and cost discipline. This was despite the consumer environment being more difficult through the year. Cost of living pressures persisted in interest rates rises and further higher fuel prices left customers more cautious, impacting sales in the fourth quarter in particular. While this meant our pro forma net profit after tax was slightly below the guidance we set, we were pleased to deliver such a material profit growth in these conditions. The Board recognizes that our share price has not reflected the progress the business has made, and we understand this has been disappointing for many of you. While we cannot control the market, our focus remains firmly on executing our strategy and careful cost management to deliver the kind of sustainable earnings growth that we believe will be recognized over time. Baby Bunting operates in a sizable market across Australia and New Zealand with a $6.3 billion total addressable opportunity. We remain the leading specialty baby retailer with around 23% share of the hard goods market. In the complementary $3.4 billion soft goods market, our sales grew 12.9% in FY '26, and we see significant room to win further share. Importantly, each additional percentage point of soft goods market share represents around $34 million of revenue. At the center of our growth plan is the Store of the Future program. In the year, we completed 12 refurbishments and a further 2 since year-end, taking the refurbished network to 17 stores. Today, these stores are delivering an average uplift of 20% and with gross margin ahead of peer stores and payback of under 3 years. In FY '27, we plan to deliver a further 10 to 12 refurbishments while continuing to value engineer build costs. With around 60 stores still to be refurbished, capital is committed to each project only once it clears a payback hurdle of under 3 years. New Zealand remains an important long-term opportunity for Baby Bunting in a market worth around $1.1 billion. Comparable store sales there grew 17% in FY '26, and our focus this year has been building the business in a disciplined way, reducing the cost base and opening our first to the future in Alcon. We expect New Zealand to reach breakeven on a pro forma net profit after tax basis in the second half of FY '27 and to contribute to group earnings from FY '28. On capital management, we continue to manage capital with discipline. We invested $44.5 million, including a record 19 store projects across refurbishments, new stores in our small format pilot. This was funded largely from operational cash flow with the balance drawn from existing facilities. We ended the year with net debt of $16.2 million and more than $60 million of undrawn headroom following the extension of our working capital facility with the NAB to $90 million. Return on funds employed improved to 15.1% from 12.1% the previous year. The Board decided not to pay a dividend for the financial year so that we can continue to invest in our store refurbishment program, which is generating superior returns for shareholders. We recognize the importance of dividends to our shareholders, and we will continue to review this in the context of the broader capital management priorities as our earnings base grows. Turning to the Board. We continued our renewal program. In September, welcoming Richard Vincent, as an independent Nonexecutive Director and a member of the Audit and Risk Committee. Richard brings more than 30 years of executive and board experience in retail and complex supply chains, including as Chief Executive Officer and Managing Director of Australian Pharmaceutical Industries, combined with a strong background in business transformation and finance. He stands for election today. Gary Levin has decided not to seek reelection and will retire from the Board at the conclusion of this meeting. Gary has served as a director since 2014, joining ahead of our listing. And on behalf of the Board, I thank him for his significant contribution to Baby Bunting. Our executive team, Darren Hockman, announced in July that he will step down as Chief Financial Officer after more than 12 years with the business. Darren has made an outstanding contribution through a period of significant growth and business transformation and has been a trusted leader of our finance function. On behalf of the Board, I thank him and wish him well. Darren will remain in the role until his successor is appointed and the Board has engaged an executive search firm to lead that process. During the year, we further strengthened the executive team with the addition of Jessica [indiscernible], an Executive Head of Property and Hanna Stars as General Manager of merchandise and planning. Following the year-end, Sabon Pelch, also joined as General Manager of People and Culture, and I welcome each of them to Baby Bunting. The Board remains committed to the long-term sustainability of our business and our positive impact on the communities we serve. This year, we strengthened our oversight by establishing a People, Culture and Remuneration Committee giving climate-related risk greater weight in the Audit and Risk Committee charter and publishing our first sustainability report under the new AASB S2 climate-related financial disclosure standards. We also expanded our car seat recycling program with the assistance of 1 of our key supplier partners Dorel, diverting more than 11 tonnes of material from landfill. That program continues into FY '27. To help support some wonderful organizations, Baby Bunting together with our customers, suppliers and team raised more than $700,000 for live Little Treasures Foundation, Panda, and our village. These are organizations that play a vital role in supporting parents of babies and young children at critical stages. In the first 14 weeks of the current financial year, we've seen continuing trading moderate as we have seen 7 stores closed for refurbishment in that first quarter also. Underlying comparable store sales growth was 2.2%. Our stores of the future program upon reopening continue to trade well and with cumulative average sales growth of now 20% based on growth in the first year since reopening of a refurbished store. As Mark will outline, comparable store sales growth is expected to moderate in the first half while our refurbishment program ramps up and to normalize as these stores reopen. We see an enormous long-term opportunity for Baby Bunting, underpinned by growing our network to more than 120 stores across Australia and New Zealand. We continue executing on our plans in a disciplined fashion, and I look forward to updating you further on progress. On behalf of the Board, I would like to take this opportunity to thank Mark and the broader Baby Bunting team for their dedication to our customers and to the business. Delivering 19 capital projects in a single year while continuing to trade and maintaining our service standards was a significant achievement. I also thank my fellow directors and our customers, suppliers and partners for their efforts through the year. With a clear strategy and strong foundations in place, we are well positioned to build on the momentum in the years ahead. Thank you to our shareholders for your continued support. I will now hand over to Mark for his update on operations and the year ahead.

Thank you, Stephen, and good morning, everyone. 3 years into this role, I am more confident than ever that our strategy is working. FY '26 was the year we executed at scale and I look forward to walking you through what that has meant for our customers, our team and our business. Before we get to the results, I want to talk to you about why we do what we do. Time is our most precious resource. Once it's gone, we can never get it back. And children are our greatest investment. The love, care and attention we give them today grows exponentially shaping the people they become tomorrow. When we devote our most precious resource to our most valuable investment, we create the foundation for something truly extraordinary. That belief sits behind our vision of the best start for the brightest future. It guides the ranges we choose and the stores we build, and it underpins our mission to support and inspire confident parenting from newborn to toddler. Our team brings that belief to life every day. In every store their passion shows in how they welcome customers, help them find what they need and take pride in getting the details right. That care shapes the experiences customers remember. To every member of our team, thank you. Turning to our results for the year. We delivered record total sales of $556 million, up 6.5% in the prior year with comparable store sales growth of 3.5%. This strong result was driven by our execution, including our new refurbished stores in market, the full year benefits of same-day and next-day delivery and strong customer acquisition of 4.2%. Comparable growth did moderate in the second half to 4.2% from the 4.7% we achieved in the first half. Reflecting the tighter consumer environment, supplier delays in the delivery of our expanded rotating car seat range and around 1,000 trading days lost while stores were closed for refurbishment. Our Store of the Future delivered average sales growth of 18% in their first 12 months since opening with our target -- within our target range of 15% to 25%. And we now have 17 refurbished stores open and trading. When we look today, we're very pleased to see that metric has increased to show an average sales growth for those stores of 20%. I'll come back to this program in more detail shortly. Gross margin was a record 41.2%, up 100 basis points, with the second half stronger again at 41.4%. This reflects a range of margin initiatives, including growing contribution of our private label and exclusive brands and the benefits of our exclusive partnership with Stu Chard, which began trading in the fourth quarter. EBITDA on a pre-AASB 16 basis was $37.6 million, representing 6.8% of sales, up 140 basis points and 8.1% of sales in the second half. This is significant progress against our long-term target of more than 10%, driven by the combination of gross margin expansion and cost of doing business leverage as store labor productivity, marketing efficiency and supply chain savings started to flow through. Pro forma NPAT of $16.1 million was up 33.9% with second half profit, up 54% as those margins and cost benefits compounded through the year. Statutory and the path was $11.2 million, up 17.5%. Our balance sheet remains healthy. Net debt was $16.2 million with more than $60 million of debt headroom and strong cash generation with cash conversion of 96%, up from 82% last year. This gives us the flexibility to keep investing in growth while maintaining a disciplined balance sheet. Moving to our operating highlights for the year. We've mentioned the record number of capital projects delivered more than in any other point in our history. That pace of execution was evident across the business from the stores we opened and refurbished to the new revenue streams we built and leverage we drove from our cost base. In addition to the store refurbishments, we opened 3 new large format stores in Dubbo, West Gate and Tagara, we optimized our network exiting Hornsby and relocating Bentley to Mentone to improve store performance, and we opened 3 Baby Bunting junior small format pilots at Marion Plenty Valley and Robina. FY '26 was the first full year of Baby Bunting Media. Our retail media business, which sells advertising and promotional space to our brand partners using our reach across Australia's largest new and expected parent audience. It generated $5.8 million of revenue, up $3 million on the prior year. We also extended our exclusive brand partnerships signing a 3-year exclusive agreement with Stocker, a leading international baby goods brand. We used existing store labor to service growing online demand and our New Zealand overhead reduction is tracking to plan with New Zealand on track for a pro forma NPAT breakeven in the second half of FY '27. We also continued to bolster our bench strength across the business with several key hires as we continue to ramp up our execution. The strength of our results was driven by our long-range plan, which seeks to reestablish Baby Bunting as a 10% plus EBITDA margin business on the same 3 pillars we set out in FY '24. We'll continue to grow our market share through extending our category leadership in hard goods, growing the network and by owning the parenting journey for the customer. 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, we are focused on completing the transformation of our store fleet, backing the highest returning opportunities first and funding growth from operating cash flow. Slide 11 shows how our strategy compounds value for shareholders. 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 from the FY '24 base. Pleasingly, 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 results where the material overhead leverage will come through continued growth of our sales base. The 2 levers that grow the sales base are our refurbishment program and network growth. Our refurbishment program still has another 60 or so stores remaining, targeting 15% to 25% growth and a sub 3-year payback. Along with our network growth program of an additional 43 large-format stores, this is a material driver of our sales growth strategy. We also have the option to grow our small format footprint subject to these meeting outperformance thresholds. Collectively, 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. Over the last 2 years, we have delivered 440 basis points of gross margin improvement and 12% sales growth. That has driven a 136% improvement in EBITDA over that same period. To support this growth plan, we have set clear targets and deliverables for FY '27. We are targeting total sales of $585 million to $600 million and comparable store sales growth of 3% to 5%. Delivery of this is based on continuing to grow our active customers building our flex portfolio and leading product innovation and availability. We are targeting gross margin of 42% through expanding retail media and offshore consolidation, moving New Zealand to breakeven and improving our operating leverage. And we are targeting capital expenditure of $33 million to $37 million, fully funded through operating cash flow. We will deliver this by refurbishing the store network, deploying growth capital and enhancing our working capital. One of the key ways in which we grow market share is through product innovation and availability. Parents come to us for brands they can trust and products they cannot find anywhere else. Private label and exclusive products now make up more than half of our sales and in FY '26, we added Stocker to our exclusive brand partnerships alongside Nuna, Joy, Edwards & Co and in New Zealand, Bugaboo, with further exclusive launches planned for FY '27. We have also made our range easier to reach. Andres Isle now lets our store teams order from our full extended and marketplace ranges for a customer in store and same day and next day delivery now accounts for 10% of our online delivery orders. The key engine of our growth strategy continues to be our Store of the Future program. The new format moves our stores from a category-led layout to an activity-led layout designed around how parents actually shop. And the results speak for themselves. The clearest proof came in the fourth quarter. As trading softened and our nonrefurbished stores fell behind plan, our refurbished stores kept trading well. Two stores that reopened late in the year delivered record opening weekend sales, and the 3 stores we reopened late in FY '25 have now cycled their first year and continue to trade to plan. Refurbishments are timed to lease renewals, and we are targeting lower average build costs as the program scales. Turning now to our outlook and to provide an update on trading. I am pleased to report that momentum has continued into FY '27 with underlying comparable store sales growth of 2.2%. This is in line with our expectations of moderating sales growth since our last update of 4.3% in August due to 7 stores closed for refurbishment. Underlying growth is adjusted for the impact of temporary store closures. For our refurbished store of the future, cumulative average sales growth is now 20%. This is the measure of sales growth in the first 365 days since the refurbished store reopening. There are now 17 stores in this cohort. New Zealand comparable store sales growth has been 8.7% on a constant currency basis, reflecting the continuing improvement in performance in that market and gross margin is tracking to plan, and we maintain our target of 42% gross margin for FY '27. On our store rollout program for the year, we plan 10 to 12 stores of the future refurbishments in FY '27 with 6 to be completed in this first half. As with any refurbishment program, the key risks are the duration of the closure period, which we are targeting 10 to 12 weeks and the level of sales redirection to nearby stores during that time. We also plan to open 3 new large format stores with Baleno opening in December and 2 committed for late in the fourth quarter and to relocate our Kawana store to Baringa both on Queensland Sunshine Coast also in December. We'll continue to refine our Baby Bunting junior pilots before considering extending this program. We reiterate the guidance provided at the FY '26 result. FY '27 pro forma NPAT is in the range of $19 million to $21 million, with approximate 1/3, 2/3 earnings spilt across the year, consistent with our historical earnings profile. In light of interest rates and cost of living pressures, we continue to closely monitor and react to trading conditions as we execute our plans for key promotional periods during the balance of the year, including the important trading periods of November, Boxing Day and our June stocktake. Our strategy is clear. We are executing with discipline and it is delivering results. We are on track to reestablish Baby Bunting as a business with an EBITDA margin above 10%. And we have the the platform in place to deliver sustainable growth for our shareholders. To our team, thank you for your passion and commitment, especially through a year of record transformation. We greatly value the ongoing trust of our customers and the collaboration of our business partners. I'd like to also acknowledge Darren's incredible contribution to the company over more than 12 years. Finally, to our shareholders, thank you for your continued support. We look forward to building on this strong foundation in the year ahead, and I will now hand you back to Stephen for the formal business of the meeting. Thank you.

Thank you, Mark. So 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 that have been submitted by shareholders and proxies and are relevant to the item will be considered. After questions and comments on each proposed resolution, I will disclose the proxy position for that resolution. Voting today will be conducted by a poll. The results of the poll will be announced to the ASX as soon as they are available. They will also be posted on Baby Bunting's website. Christina Piccolo of Computershare has agreed to act as returning officer, and I now appoint her. Thank you, Christina. Moving to the items. The first item relates to receiving and considering the company's accounts and reports. I'll now invite questions from shareholders on this item. Are there any questions? David?

Congratulations. David Kingston, K Capital. Congratulations. The good presentations. So very thorough. The market loves them too. stocks up $0.11 this morning. So that's a real endorsement of the presentations. So well done. Look, my biggest issue is we all accept that retail is challenging, no doubt about that across the whole board. Baby Bunting shares peaked at around about $6 a few years ago. they were $3 a year or so ago. You're not alone. Most retail has been really challenged. I suppose my biggest issue is that lot of stats there that all look impressive. But at the end of the day, one that I focus on is free cash flow. And there's many, many ways to skin the cat, but under the cash flow statement, when you included the CapEx you're spending, your net cash flow is 0 for the last year. I know you can spend it many ways, EBITDA and whatever, but and capitalize things. But free cash flow is around about 0 on that simplistic parameter of looking at the cash flow statement. Hence, you've probably taken a sensible decision to not pay a dividend. Now I accept that there's a turnaround situation. You are refurbishing stores. That's a judgment call. You've mentioned that your payback period is 3 years, which is okay. If that's the case, sometimes things don't turn out as well as they looked at. But I suppose the biggest issue from my point of view is you've got huge leverage in your rental payments. Your lease liabilities in the balance sheet at current and noncurrent, are $150 million, which is well over your market capitalization. I know they're spread out over a number of years. But you've got huge rental liabilities as to almost all retailers. I'm less concerned about your debt, which is about $16 million, which is pretty small. But the amount of money is spending on CapEx for refurbing stores, $33 million to $37 million next year, it just keeps going on and on and on. And just worried about the lack of free cash flow concerned about 0 dividends because shareholders really only invest in the company for 2 reasons: dividends and capital gain. At the moment, there's no dividend and no capital losses. I appreciate it may well be an interim situation that you've got to rebuild and refocus and reformat the stores. But that's just a couple of quick comments. But overall, I think you're doing pretty well, good presentations. It's a tough market. So everyone is in a challenging position, but just a bit worried about the lack of cash flow.

Thanks, David. I won't respond to each of those elements, but I understand the sentiment. Let me just give shareholders some comfort. The Board is equally focused on operating cash flow and the deployment of CapEx and particularly for that to be in a balanced way. One of the clear points of execution over the past 2 years has been the performance of refurbished stores. I challenged many retailers in this market let alone globally to have store growth of what we've been publishing now for in excess of 18 months on a store refurbishment program. I think that goes to the strength of the revised offer, the quality of the consideration and input that both the Board and the executive put into that reformation, transformation. And your point is then absolutely valid. The question is about balancing that with expected returns against the further deployment of cash or capital. So again, without being repetitive, that is absolutely on the mind of the Board and absolutely being considered. I will comment, though, on the dividend question. I can assure you that, that was a long debate at the Board table. We are considerative both the current share price, the market cap and returns for both institution and retail holders. So that will continue to be a live discussion moving forward. Finally, in relation to the share price, in my experience and having lived through a few of these, I've learned a lesson very early on that I can't control the market. But what I have seen repetitively is when strategy has been executed and some of the macroeconomic environment turns, our price will be exponentially returned to a level that it should be appropriately. No one can be more frustrated with the current price than some of the management team. We've got considerable holdings in that area as much as some of the other directors, notwithstanding the broader market. our challenges for them to be absolutely laser-like focused on strategic execution. And in my mind, the rest will come at an appropriate time. Thank you. Corey, do we have any other questions?

Chair, we've had some questions severed online. The first question comes from Stephen Maine. Thank you for upgrading from a physical age in Melbourne last year to a hybrid AGM today via the excellent Computershare platform. But why the switch to Sydney when we are a Melbourne-based company. Is this a permanent switch to Sydney? Or will we be running a hybrid Agilent year -- and a final comment also thanks for disclosing the proxies early to the ASX and well done for receiving such strong voting support on all 6 items.

Thank you, Stephen. I will take that as an absolute highlight that we've received some notable dates from Stephen in relation to us questions. Let me be quick in some of the response. The reason why we're in Sydney is that we've alternated our AGMs now for the past at least 5 years between Sydney and Melbourne. It's a practice that I see we need to continue, given that gives exposure to our retail holders and participants in both capital cities. On the question of whether we will have a hybrid meeting in Melbourne next year, that will be absolutely the case as we again alternate from the 2 capital cities.

To the next question from Stephen Mayne relates to the composition of our share register. Does anyone at today's AGM know what happened to Rouse Super. They were our second largest shareholder with 12.1% when last year's full year results were released and now they are no longer a substantial holder. Do you know if they have sold out completely? And do we meet with them after the full year results this year? Also, how do we deal with our largest shareholder, the activist investors from HMC Capital, how active are they in their engagements with us.

Thanks, Stephen. I'll respond to the Aussie Super question, but if I miss anything, Mark, and Darren, please had as necessary. So shortly after last year's AGM, the portfolio manager for RasiSuper went into retirement. And as a consequence, they rolled their small caps funding to a broader funding portfolio, fundamentally triggering a sell-down of our stock. That was done in a transparent in a constructive way with management being clear on that activity. And that stock is now being absorbed by a number of shareholders that still exist on our register. On the question of HMC, I can only describe that relationship as constructive and in the same vein as any of our other major institutional holders. We meet with them regularly. They are considered in their response and their activity, transparent when things are needed. And so I can only describe it as a constructive relationship, all things considered.

Chair, the next question from Stephen Mayne relates to our audit. Ernst & Young was officially appointed as our external auditor at the 2017 AGM and have we conducted a full competitive audit tender since then? And if not, when are we next likely to tender the audit? Please don't talk about 5 yearly audit partner rotation. We all know this is the law. The U.K. has moved to mandatory audit tenders every 10 years. Where do we sit on this issue?

Thanks, Stephen. So you are correct in our last official tender was in 2017. Let me just say that your question is noted and will be considered. But we don't have any immediate plans to tender our audit service. We are currently more than satisfied with the level of interaction and the quality of the service from our auditor. However, let's again accept the questions noted and we'll consider the matter.

Chair, the next question from Stephen Mayne is since we gathered at the 2025 AGM, there has been a lot of press about retail crime with suggestions that it is worse in Victoria than other states. What has our experience been in recent years across the different states? Have we had to invest more into security? And how big a problem is shop lifting at our stores, including Victoria?

Mark, I may get you just to comment on this, if you wouldn't mind, but I'll give some opening remarks, if I may. Can I assure both shareholders and the broader market that we take the safety of our store staff as extraordinarily critical. So they are trained in relation to any of this activity around store crime, particularly some of the aggravated crime that's existing across the country as we speak today. It's not just an isolated activity in Melbourne, but it has been witnessed in every capital city to the best of my knowledge. So no state is immune. I only again repeat that the protection and the safety of our store staff is almost in our mind. And with that, I might throw to Mark with any other comments or activity.

We are very fortunate, Stephen and to your question. We're very fortunate in Baby Bunting to enjoy very low levels of shrink and theft through the network. We have very low levels of shrink across the business. Those levels have been historic and we have not seen material elevation in them at all. So in a fortunate position relative to some other retail categories.

Good question, though, Stephen. Thank you for that.