An unforgiving bear market: Baby Bunting shares dive -25% as inflation digs into margins

The bear market is not forgiving when it comes to downbeat updates, even if the bad news is only temporary. Baby Bunting (ASX: BBN) shares nosedived -25.8% in early trade as margin pressures weighed on FY23 year-to-date earnings.

As at 7 October, Baby Bunting said its top line continued to grow, with total sales up 12.0% and comparable store sales growth of 7.6%.

Still solid top line growth failed to trickle down to profits as first quarter FY23 margins tanked 230 basis points compared to a year ago and as a result, profits were down $3m compared to the first quarter of FY22.

Margin performance explained

Baby Bunting pointed to several factors that compressed margins in the first quarter. This included:

• Maintained entry price points

• Competitor pricing impact on top selling items

• Input costs rising quicker than retail prices

  • Domestic freight (~70 bps)

  • FX rates (~20 bps)

• Playgear category impacted 60 bps as it cycles covid-related performance in FY22

• Loyalty program resulted in higher-than-anticipated redemptions, impacting margins by 60 bps more than expected

Recoverable losses

"Our first quarter margin performance has been below our expectations, although I do note that the first quarter is our smallest period of earnings," said CEO Matt Spencer.

"We have plans in place to address the first half impacts outlined above to recover earnings over the full year," he added.

Baby Bunting expects the margin impact from loyalty program redemptions to be mostly insulated to the first quarter as a new product that was recently introduced in November 2021.

Loyalty program aside, the AGM lacked details about how margin recovery was going to take place. Management on emphasised on value amid "tougher economic times" and continue to maintain entry price points across its range and 5% price beat promise.

In absence of raising prices, it does raise a few questions as to how the company will recover the decline in margins in the first half.

A brutal selloff

Baby Bunting shares are down around -25% at noon on approximately 2.2m volume. Even with four more hours left of trade, that's the stock's largest volume day since 13 August 2021.

The price action for Baby Bunting has been brutal, with the stock opening -9% lower and so far only moving in one direction. Down.

Baby Bunting share price chart