Baby Bunting Group Limited (BBN) Earnings Call Transcript

Thank you for standing by, and welcome to the Baby Bunting Group Limited FY '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. Welcome to Baby Bunting's FY '25 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 '25 has been a great year for Baby Bunting. We achieved record sales and record gross margin, and we delivered at the top end of our guidance range. It's been a year where we've executed well on our strategy. But before I speak to the numbers, I wanted to step back and talk about the why that drives us. Time is our most precious resource. Once it's gone, we can never get it back. Children are our greatest investment. The love, care and attention we give them today grow 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. At Baby Bunting, our vision is simple yet profound to give every child the best start in life so they can grow into their brightest future. This vision informs every decision from the exclusive products we curate to the way we've designed our new stores. Our mission to support and inspire confident parenting drives our culture and our values. And it's our extraordinary team right across the business that turns this purpose into action. Their talent, passion and relentless commitment bring our vision and mission to life every day, creating exceptional experiences for our customers, innovating in our offer and finding new ways to support parents. It's this alignment of purpose and performance that delivers results and ensures we are making a meaningful difference for the families we serve. Turning to Slide 6. I'm pleased to share that our disciplined execution of strategy delivered a truly standout FY '25 result. Total sales reached a record $522 million, representing a 4.7% growth on the prior year. On a comparable store sales basis, we achieved growth of 4.2%. This was underpinned by a focus on go-to-market execution, driven by product innovation, elevated marketing and enhanced in-store execution. In the second half, we refurbished 3 stores into our new Store of the Future format. Customer response to the new design has been outstanding, and these stores have delivered an average sales uplift of around 28% since reopening. We exceeded our 40% gross margin target with a 340 basis point uplift versus the prior period. In the second half, gross margin was 40.5%, providing great momentum into FY '26. And our pre-AASB 16 EBITDA increased to $28.2 million to be 5.4% of sales. We're making meaningful strides towards our medium- to long-term goal of being a 10% plus EBITDA margin business. Pro forma NPAT was at the top end of our guidance at $12.1 million, up 228% versus the prior period. And we have improved returns from our disciplined capital investment with return on funds employed of 12.1%, up 630 basis points with net debt closing at $4.6 million. The Board has determined not to pay a dividend this year as we continue to reinvest for growth. All in all, a fantastic result, which is a testament to the hard work of our dedicated team over the past 18 months. On Slide 7, we highlight the breadth of strategic operational initiatives delivered in FY '25. We're very proud to say that we delivered a lot this year. First and foremost, the April launch of our new Store of the Future marked a pivotal inflection point for the brand. The format is delivering world-class experiences that have been driving an outstanding lift well above our initial 10% growth target. We've also seen immediate margin improvements through range rationalization and mix shift. We opened 2 new stores and completed 3 refurbishments, growing our network to 75 locations across Australia and New Zealand. Elevating our customer experience remains at the heart of our strategy. We invested in our online capability by introducing same-day and next-day delivery via Uber, which now accounts for 8.5% of all online orders, enhancing convenience and driving increased basket size. Also important to driving both traffic and margins was the traction we achieved on private label and exclusive products and our exclusive brand partnerships. This includes our long-term exclusivity with Nuna, exclusive partnerships with Bugaboo in New Zealand and a new 5-year Australian exclusivity deal with Edwards & Co. We successfully launched our Retail Media business this year and initial campaigns have seen very strong uptake and results for our brand partners. In New Zealand, we now see a clear pathway to profitability in FY '27. We'll talk more about that later in the presentation. I'll now hand over to Darin to provide an additional details on our financials.

Thanks, Mark, and good morning, everybody. We're on Slide 9, which provides more detail on the company's sales performance and the most impactful growth drivers this year. Comparable store sales grew 4.2%, accelerating through the year from 2.2% in the first half to 6.2% in the second half. Range innovation and newness fueled good sales momentum across our top 7 categories, which are around 80% of our sales and drove higher transaction counts and basket sizes in the second half. We're delighted with our comp sales performance over the past 12 months with every consumer channel, bricks and mortar, online delivery and Click and Collect recording strong improvement. Our new customer acquisition rose 6.2%, bringing total active customers to 828,000 as our marketing investments and enhanced product ranges continue to expand our reach. Online sales, including Click & Collect, grew 10.8% year-on-year and now represent 23.1% of total sales. This growth was powered by the introduction of Uber on-demand delivery, improvements to our online checkout flow and better stock availability. Turning to Slide 10. I'm pleased to report a record gross profit result for FY '25 with margin up 340 basis points on the prior year in what remained a challenging retail environment. As you can see on the gross margin bridge, this improvement was driven by a suite of initiatives. We simplified our pricing architecture, removing spending in loyalty incentives and price beats on sub-$50 items, and we renegotiated supplier trading terms to capture better cost of goods. Our supply chain programs also delivered lowering fulfillment costs across both stores and online channels. PLEX now accounts for 47.1% of our sales, up 110 basis points versus PCP and soft goods is up 7.7%. This category represents a significant growth opportunity for Baby Bunting in a $3 billion TAM. The merchandising changes we have made in our new store of the future will be fundamental to growing our share of this category. These initiatives will continue to drive margin enhancement and underpin our 41% FY '26 margin target. Turning to the P&L on Slide 11. As Mark mentioned, we delivered record total sales and significantly grew gross margin dollars by 14.2% on the back of the margin initiatives I've just spoken to. Our cost of doing business was $181.5 million for the year, up $13.8 million, reflecting the strategic investments underpinning our growth. I'll break these down further on the next slide. Slide 12, cost of doing business. Store expenses are the biggest contributor to our CODB growth, up $7 million on PCP on the back of $4.3 million in new store costs plus 3.75% of labor inflation. We did offset nearly half of the CPI increase through store labor productivity initiatives and with further leverage expected on the labor line in FY '26. Marketing investment increased to 2.2% of sales this year, in line with plan as we invested in team to support brand engagement, execution speed and our Store of the Future program. Warehouse costs rose in Australia due to wage inflation with work now commenced to lowering pick and fulfillment costs in our national DC in FY '26. In New Zealand, we've reduced second half warehouse costs by $200,000 and expect a further $800,000 of savings in the FY '26 financial year. Administration costs, our second largest cost investment, increased on the back of the reinstating our employee short-term incentive program, noting it hasn't operated for a number of years. We also invested in data and analytics capabilities critical for driving personalized customer experiences and operational insight. Our focus for FY '26 is delivering overall CODB leverage through productivity initiatives across store execution, online fulfillment and the supply chain initiatives in both New Zealand and Australia. Moving to Slide 13. Our balance sheet reflects disciplined working capital management and an improved net debt position. Inventory remains well managed, closing at $95.6 million with improved quality and aging of inventory through the period, thanks to disciplined focus and enhanced processes. Our net debt balance stands at $4.6 million, an improvement from $30 million in the prior year. We have covenant headroom and financial flexibility to fund our growth initiatives. Moving to the cash flow statement on Slide 14. Our cash conversion ratio of 81.7% is in line with our historical average and our target. Investment expenditures for the year totaled $12.9 million, which included investment in 2 new stores, our Store of the Future refurbishment program and one store relocation. Outside of store investment, key builds included digital assets such as same-day, next-day capability and data platforms. In FY '26, we expect our CapEx to be around $30 million to $35 million, fully funded from operating cash flows. New Zealand performance. Finally, on Slide 15, you can see that we've made excellent progress in New Zealand and see a clear pathway to profitability in FY '27. For FY '25, our 4 store network delivered a 49% sales increase, noting 3 of our 4 New Zealand stores opened late in the first half of last year. The second half was a true like-for-like comparison, and it was great to see these stores deliver comp growth of 22% in the second half. Gross margin expanded by 520 basis points with a 2H exit rate of 39.5%, up 600 basis points year-on-year. The brand awareness campaign we invested in had a strong impact in market. It has increased unaided brand awareness rising from 19% to 25% over 3 months. Looking to FY '26, we are running at sales growth in the first 6 weeks of 13.9%. We will further enhance labor productivity, target a gross margin above 40% and open our Westgate store in the new format towards the end of the half. We expect these combined levers to materially progress our aim of achieving profitability in FY '27. I'll now hand over to Mark to provide an update on our strategy progress this year.

Thanks, Darin. We're now on Slide 17. As a reminder, our growth strategy is focused on 3 key pillars: driving growth in our market share, our EBITDA margins and our return on invested capital. Slide 18 illustrates how our strategy drives a powerful multiplier of shareholder value through 4 interconnected growth engines. First, gross margin, where our target is to get to 42%, a lift of 500 basis points from the FY '24 base. In FY '25, we have delivered 340 basis points of expansion, and we're targeting a further 80 basis points of improvement in FY '26. Second, through refurbished store sales growth, our Store of the Future pilots have delivered on average a 28% uplift in sales. We've now upgraded our sales target for refurbished stores to be between 15% and 25% growth. With plans for 10 to 12 refurbishments this year, this program will be a key engine of growth into the future. Third is network growth. We have a disciplined plan to add up to another 80 stores over the medium to long term. That's 40 large-format stores and the possibility of a further 20 to 40 small format stores, subject to the performance of the small format pilot. And the fourth engine to grow shareholder value is operating leverage. We will achieve this through network growth and productivity initiatives to capture 200 basis points of leverage. Together, these 4 elements create a self-funding, high-growth, high-return model that accelerates us back to a 10% plus EBITDA margin business. The next few slides unpack our store economics, including our store refurbishment program. On Slide 20, you can see how our large-format stores continue to be a powerful driver for cash generation and returns. Our mature store cohort is demonstrating strong momentum and delivering CODB leverage. Looking ahead, our large-format rollout over the next 5 years targets 24 new metro and 15 regional stores in Australia. Additionally, we are planning a further 6 large-format stores in New Zealand. Moving to Slide 21. One of the most transformative strategic initiatives is our Store of the Future, a true game changer in revitalizing our network and driving sales and profit growth. Our 3 revamped stores have been incredibly well received by parents with average store sales up 28% and new customer acquisition up 21%. Overall, these stores are delivering 40 basis points more in gross margin than their peer cohort. The Store of the Future is the physical manifestation of our strategy, experience hubs where parents can engage, learn and shop seamlessly, fulfillment powerhouses driving omnichannel convenience and brand showcases where our partners can launch innovation and inspire families. Alongside this physical refurbishment, we're reinventing our internal service model, moving from a category-led layout to an activity-based design. This store is now organized around key parenting activities, travel, feeding, sleep, play and learn and well-being. By designing around these parenting activities, we'll highlight more of our range and meet more of our customers' needs. This is an exciting opportunity to reimagine the customer journey and set new industry benchmarks. On Slide 22, we provided further detail on the capital program and volume of work underway. This year, our Store of the Future prototypes cost $1.5 million each. Our original build cost assumptions were predicated on a key business case objective of a sub 3-year payback. Along with a reasonable sales uplift of 10%, which in my experience is highly achievable. I'm delighted that these pilots are outperforming sales expectations by around 3x. This strongly validates the concept and gives us the confidence to scale. As we roll out this format more broadly, we will drive down per store CapEx investment through cost and operating model efficiencies. In FY '26, we plan to refurbish and relaunch 10 to 12 flagship metro stores, each requiring an average capital investment of $1.4 million. Post refurbishment, we forecast a 15% to 25% sales uplift driven by new customer acquisition and larger basket sizes as we've seen with our pilot stores. FY '26 will include accelerated depreciation of around $1.5 million and one-off de-fit and launch costs. Taken over the life of the program, the average estimated investment per refurbishment will be around $1.1 million and generate much stronger returns than our original plan. On Slide 23, we've set out our focus areas for FY '26. We've touched on a number of these in our earlier comments. These are all deliverables that tie back to our growth objectives and overall strategy. I'll briefly speak to 2 of them, our small format stores and our retail media business. We are now on Slide 25. Our rationale for small formats is clear. They grow customer lifetime value through providing greater convenience and accessibility for busy parents. They should allow us to extend Baby Bunting into high-density innercity catchments with better economics. With lower capital requirements and faster payback, each store targets $2.5 million in annual revenue and a 50% return on invested capital by focusing on higher-margin consumables and core baby essentials. Lower staffing needs and optimized rent per square meter further enhances returns. With a curated range across babyware, consumables and selected nursery essentials for growing children, we will capture further opportunities and look to drive lifetime value and basket size with our customers. To deploy our test-and-learn approach, we have 3 pilots underway in carefully selected metro suburbs that are close to existing established large-format stores. This will give us the most comprehensive test case to assess their performance and plan for network expansion. Should these pilots be successful, we see potential to expand the small format network to 20 to 40 stores over the medium to long term. We look forward to providing an update on these in due course. On Slide 28, we showcase how we are realizing a new revenue stream through monetizing our existing assets. We think our retail media income has the potential to grow to be around 1% to 2% of total sales. Our platform gives brands access to Australia's largest baby and toddler audience. Over the past year, we have leveraged the power of our platform, combining our more than 800,000 active customers, our rich CRM data, our high-traffic store network and digital assets to create our retail media offering. This enables us to drive incremental revenue and deepen engagement with existing and new brand partners and increase our relevance to customers. Media contribution to profit was flat in FY '25. And looking ahead, we expect this business to contribute an incremental $2 million to $3 million in FY '26 as we scale our platform, enhance our analytics offering and introduce new ad formats. Our Store of the Future format will provide a strong platform for this opportunity. To wrap up, let's now move to the trading update and outlook on Slide 31. I'm pleased to report that momentum has continued into the first 6 weeks of FY '26 with total sales growth of 4.8% and comparable store sales growth of 4%. Pleasingly, New Zealand has continued to outperform, up 13.9% for the year-to-date. Our plans are to refurbish 10 to 12 stores in FY '26 with 5 to 6 to be completed in the first half. Each of these stores should be closed for around 10 to 12 weeks during the refurbishment period. We also plan to open 5 new large-format stores with 3 committed for the first half and 2 targeted in the second half. In terms of our new small formats, the 3 pilot stores are planned to open in the first half of FY '26 with a further 2 to 3 planned for Q4, subject to the success of those pilots. Now looking to the performance for this year. We expect the Store of the Future refurbishment program to result in some unusual comp sales patterns through the year as well as some impacts to our CODB profile. Guidance for FY '26 is for pro forma NPAT to be in the range of $17 million to $20 million, assuming the following: our full year comparable store sales growth of 4% to 6% with first half comps of 1.5% to 3%, driven by refurbishment closures and 6% to 8% in the second half with post-refurbishment sales growth targeted to be between 15% to 25%. We are targeting gross margin to be at 41% for the year and retail store cost of doing business investment of around $7 million for new and annualizing stores and $2.5 million of refurbishment-related costs, targeting CODB leverage of around 30 bps on a post-AASB 16 basis and capital expenditure of $30 million to $35 million fully funded through operating cash flow. To close, I wanted to thank you for joining us today. I'm very pleased by the early success of our Store of the Future program, and we're excited to be rolling it out across the network. I'd now like to open the line up to questions.

[Operator Instructions] Your first question today comes from James Casey with Ord Minnett.

With regards to the sales growth, you called out the second half '25 comp at around 6% implies quite a strong growth rate through May and June, probably double-digit comp. First 6 weeks is back to a more consistent 4% comp. I just wonder if you could just explain kind of the volatility in that comp store growth rate.

Thanks for the question, James. I might characterize it a little bit differently. I think in a tough consumer market, we still see customers gravitate very strongly towards key promotional times of the year. We did execute a very strong stock take campaign, which certainly helped to contribute to an acceleration through the tail end of the second half. The way that I read the numbers is that I think a 4% comp leading into the first 6 weeks of FY '26 is a very strong result following a very strong promotional period. And so certainly above the expected comp for the full half of H1 FY '26 at 4%, but we're very pleased with the result.

Okay. And then the gross profit margin improvement for '26, 80 basis points, is the supplier renegotiation for terms and rebates, et cetera, is that now complete?

James, we completed the substantial part of that program in FY '25. The benefits of those negotiations have been flowing through at different cadences depending on how those terms negotiations were structured. The long tail benefit being if we received COGS reductions, you'd appreciate that the weighted cost of inventory moving through the business over several months, given our average stock holding takes a bit of time to move through the system. That's what we saw in Australia, and that's also been the experience now that we've seen in the second half in New Zealand, where you can see very strong margin performance in the second half.

Yes. Okay. And just one final one, maybe a bit difficult to answer. But just in terms of the dividend, given the improvement in the result and the stronger financial position the company is in, what would be the trigger to resume the dividend payments for the company?

James, as you know, dividend policy is determined by the Board. I think reflecting on where we are for the year, I think it's a testament to the strategy and the turnaround that in FY '26, we're going to be able to fund between $30 million and $35 million worth of CapEx from -- within operating cash flows. The returns that we're generating on these stores are outstanding, and the Board will continue to monitor this against our strategy execution on an ongoing basis.

Your next question comes from James Bales with Morgan Stanley.

Firstly, on comps. So we understand how strong the new stores have been, but it seems like the rest of the network has improved as well. Can you explain what's going on there? And excluding all of the closures, et cetera, how much of that is sustainable into '26 and '27?

Yes. Thanks for the question. The comp performance overall has been strong, as we indicated in the release across all channels. We've seen improvements in bricks-and-mortar comp sales, our Click and Collect and online delivery. And I think that points to the overall health and return of the business' performance. We've spoken at several points during the cycle over the last 12 months since we released our new strategy. And this sustained improvement in our go-to-market performance is really resonating with consumers. We saw growth in volume and growth in ASP over the course of the 12 months. And when you combine that with a view across all of our channels seeing good, strong positive momentum, that patent has been sustained now for a prolonged period of time. So we're feeling really good about the business' overall performance as we head into FY '26 and give guidance again this year.

Got it. And then maybe just on your comments on retail media, the 1% to 2% of total sales being an incremental revenue opportunity for you. Can you maybe outline what sort of CapEx and OpEx is required to achieve that?

We haven't disclosed specifically incremental CapEx and OpEx. But as part of the new store of the future build, where we have brought to life new merchandising display units for brands to be able to showcase their stories and digital panels in the store, that's all included as part of the CapEx guidance that we provided for new Store of the Future. Beyond that, James, what we're really doing is making available the assets that we already own and providing them to our brand partners as part of our retail media network. So effectively, what we are doing, we are flexing existing assets and capability that we have brought together to deliver this opportunity.

Okay. That makes sense. Then one last one, 28% sales uplift on the refurbs, totally amazing result and totally understand why you wouldn't want to extrapolate that. But I just wanted to understand whether there's a reason why you've set the expectations for the sales uplift on the next refurbs to be 15 to 20.

Well, James, having been at this for quite a long time, the results that we are generating is certainly beyond what our expectation was initially. 28% is a very strong number, but we're still mindful of the fact that these stores are reasonably early in their life cycle. Maribyrnong, which has been open for the longest period of time now has just been opened for 16 weeks with the other 2 stores at around 8 to 10 weeks. So we still see a settling of sales, but that has been a very predictable trend line. Beyond that, when we think about extrapolating that over the diversity of our catchments and store network, we are expecting some moderation in some store results, and that's why we provided a range of 15% to 25%.

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