Severe discounts applied to Baby Bunting's (ASX: BBN) core product line has resulted in the retailer posting a significant half-year profit drop.
The listed retailer posted a $3.48 million net profit during the first six months of FY18, down a third on the prior corresponding period's $5.22 million profit.
The company's chief executive Matt Spencer says the baby goods sector experienced "aggressive discounting" during the half as some retailers closed down and cleared stock.
"Our pricing moved to meet these developments," says Spencer.
Spencer says the company expects retail conditions to improve during the second half thanks to a stabilisation of competition and the deployment of company initiatives that include increasing the number of exclusive products for sale and reaching better trading terms with suppliers.
"While our market share continues to grow, the impact of price deflation and some supply issues in the car seat, baby carrier and toy categories during the first half, constrained our earnings growth," says Spencer.
"We are seeing some signs that market conditions are stabalising."
During the first half total sales grew 9.8 per cent to $148.3 million but comparable store sales were down 1.7 per cent against the prior corresponding period.
Over the pre-Christmas period the retailer says trade was subdued, but Boxing Day and stocktake sales were stronger and this momentum has continued into the second half.
Comparable store sales during the first six weeks of H2 were up 4.5 per cent.
Spencer says despite the woes of the first-half, the company is still the Australian market leader in baby goods.
"We retain market leadership in the sector post the consolidation that has occurred in the first half of FY18," says Spencer.
The company saw significant success in South Australia, with sales growth of 22 per cent achieved over the period. The company recently opened two new stores in Adelaide at Mile End and Munno Para which doubled the Adelaide store network.
"The new Adelaide stores are in excellent locations to meet existing high demand and to generally improve customer experience in Adelaide," says Spencer.
"As we pass the anniversary of the opening of the two new Adelaide stores, this effect on comparable store sales will diminish. While there has been a short term impact on comparable store sales growth, we are seeing the benefits in terms of market share growth."
The company's expectations for its full-year earnings remains unchanged from its November guidance with earnings before interest, taxes, depreciation and amortisation forecast to be around $23 million.
The company's board announced an interim fully franked dividend of 2.8 cents per share and will be paid on Friday 16 March 2018.
Shares in the retailer are up 11.53 per cent to $1.64 per share at 10.08am AEDT.
Business News Australia
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