Baby Bunting Group - Best of breed growth

Baby Bunting Group - Best of breed growth

Baby Bunting Group - Best of breed growth

Retail│Australia│Equity research│November 22, 2015 IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP Powered by EFA Baby Bunting Group Best of breed growth Baby Bunting offers unique exposure to the defensive but growing Australian baby ■ goods industry, which we believe will change substantially over the next decade as smaller players struggle to remain viable against one or two major competitors.

This is where Baby Bunting is set to benefit meaningfully in coming years. We see a scenario where Baby Bunting beats its FY16 prospectus forecasts, but ■ await the 1H16 result moving our forecasts any higher. Baby Bunting is far from ‘cheap’, trading on 24x FY17F; however, we believe the ■ stock offers one of the most attractive, long-dated earnings growth profiles in our retail sector coverage. The PEG of 0.9x FY16 and 1.0x FY17 is not onerous. No debt and a net cash position provide ample capital flexibility. ■ The long-dated nature of this earnings growth (3-year EPS CAGR of 23%) is ■ captured in our DCF valuation of A$2.46.

We initiate coverage with an Add rating. Australia’s largest specialty retailer of baby goods Baby Bunting is Australia’s largest specialty retailer of baby goods, currently operating 33 stores across Australia. Baby Bunting’s products primarily cater to parents of children from newborn to three years of age. The company procures and stocks product from a wide range of third-party brands and suppliers in addition to offering private label and exclusive branded products (c7.2% of sales).

Operating in a defensive but growing industry Baby Bunting has a c7.8% share of its addressable market (cA$2.3bn pa) in Australian baby goods retailing. The industry is extremely attractive in that it is highly fragmented (large number of small, specialty players), the number of births continues to grow and strict Australian mandatory product safety standards provide strong barriers to entry. The domestic baby goods industry has been cottage by nature for a long time; however, we believe this dynamic is set to change significantly over the next decade as the smaller players struggle to remain viable against one player in particular growing quickly.

Typical retail growth blueprint – but in its infancy In addition to lfl sales growth, the majority of Baby Bunting’s sales growth (+21.3% in FY16F) will come from the new store rollout. Based on Baby Bunting’s long-term store target of 70+ stores, the group is less than 45% of the way through its rollout potential. Not since JBH’s IPO in 2003 has a similar quantum of store growth been on offer at the time of listing. Most importantly, Baby Bunting has invested ahead of the curve (distribution centre (DC), head office) in relation to its store rollout. EBITDA growth (+32.1% in FY16F) is well in excess of sales growth as the group’s increased scale brings about better supplier trading terms in addition to increased penetration of private label/exclusive product sales.

From FY17, the group will also be in a position to leverage recent investment in a fully formed head office support structure/ DC. The long-dated growth is too good to ignore – Add and A$2.46 PT We value Baby Bunting at A$2.46 using a pure DCF methodology, which we believe best captures Baby Bunting’s strong and, more importantly, long dated earnings growth. Key risks include: softening consumer sentiment/spending, a falling AUD, failure to secure new store sites and higher-than-expected rates of cannibalisation. SOURCE: MORGANS, COMPANY REPORTS ADD Current price: A$2.19 Target price: A$2.46 Previous target: A$ Up/downside: 12.2% Reuters: BBN.AX Bloomberg: BBN AU Market cap: US$198.3m A$275.0m Average daily turnover: US$1.41m A$1.96m Current shares o/s 125.6m Free float: 65.0% Price performance 1M 3M 12M Absolute (%) 18.4 Relative (%) 18.0 Josephine LITTLE T (61) 7 3334 4505 E josephine.little@morgans.com.au Financial Summary Jul-14A Jul-15A Jul-16F Jul-17F Jul-18F Revenue (A$m) 150.2 180.2 218.6 257.1 300.9 Operating EBITDA (A$m) 8.00 12.40 16.30 20.30 24.66 Net Profit (A$m) 4.12 6.86 9.10 11.37 13.96 Normalised EPS (A$) 0.03 0.05 0.07 0.09 0.11 Normalised EPS Growth 251% 67% 33% 25% 23% FD Normalised P/E (x) 66.79 40.09 30.22 24.19 19.70 DPS (A - 0.054 0.070 0.086 Dividend Yield 0.00% 0.00% 2.47% 3.18% 3.91% EV/EBITDA (x) 34.38 21.81 16.31 13.11 10.78 P/FCFE (x) 28.06 91.16 NA 32.75 25.68 Net Gearing (5.7%) (10.1%) (9.7%) (9.7%) P/BV (x) NA 3.38 3.03 2.96 2.88 ROE 16.9% 10.6% 12.4% 14.8% % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x) 94.0 108.0 122.0 136.0 150.0 1.30 1.50 1.70 1.90 2.10 2.30 Price Close Relative to S&P/ASX 200 (RHS) Source: Bloomberg 5 10 15 Oct-15 Oct-15 Nov-15 Nov-15 Vol m

Baby Bunting Group - Best of breed growth

Retail│Australia│Equity research│November 22, 2015 2 Figure 1: financial summary SOURCE: MORGANS RESEARCH, COMPANY Profit and loss Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E Valuation details Revenue 150.2 180.2 218.6 257.1 300.9 Share Price $2.19 Market Cap A$470.9m Gross Profit 49.9 61.9 76.8 91.1 106.9 Price Target $2.46 EBITDA 8.0 12.4 16.3 20.3 24.7 Upside to Target 12.2% WACC 11.0% Depreciation -2.0 -2.4 -3.1 -3.9 -4.5 Total Sharholder Return 14.6% Amortisation & impairments 0.0 0.0 0.0 0.0 0.0 EBIT 6.0 10.0 13.2 16.4 20.1 Net Interest Income -0.2 -0.2 -0.2 -0.2 -0.2 Multiple Weighting Valuation Pre-tax Profit 5.8 9.8 13.0 16.2 19.9 DCF 100.0% $2.46 Tax -1.7 -2.9 -3.9 -4.9 -6.0 Premium / discount (%) 0% Reported Profit 4.1 6.9 9.1 11.4 14.0 Price Target $2.46 Exceptional items 0.0 0.0 0.0 0.0 0.0 Normalised Profit 4.1 6.9 9.1 11.4 14.0 Key metrics/ multiples Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E P/E 0.0 40.1 30.2 24.2 19.7 Cash flow statement Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E Yield 0.0% 0.0% 2.5% 3.2% 3.9% EBITDA 8.0 12.4 16.3 20.3 24.7 PEG 0.0 0.6 0.9 1.0 0.9 Net interest -0.8 -1.1 -0.3 -0.2 -0.2 EV/EBITDA 0.0 21.8 16.3 13.1 10.8 Tax 0.0 0.0 -6.1 -4.9 -6.0 Price/ Book Value 0.0 3.4 3.0 3.0 2.9 Changes in working capital -1.4 -4.4 -2.8 -1.5 -1.9 Price/ Net Tangible Assets 0.0 7.9 6.3 6.0 5.6 Operating cash flow 5.8 6.9 7.1 13.8 16.6 Capex -3.5 -6.0 -5.4 -5.4 -5.9 Operating cash flow yield 1.2% 1.5% 1.5% 2.9% 3.5% Free Cash Flow 2.3 0.9 1.7 8.4 10.7 Free cash flow yield 0.5% 0.2% 0.4% 1.8% 2.3% Acquisitions and divestments -0.8 -1.3 0.0 0.0 0.0 Other Investing cash flow 9.2 0.0 0.0 0.0 0.0 Per share data Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E Investing cash flows 4.9 -7.3 -5.4 -5.4 -5.9 Diluted shares on issue 125.6 125.6 125.6 125.6 Increase / decrease in Equity 63.9 0.0 25.0 0.0 0.0 Reported EPS (c) 5.46 7.25 9.05 11.12 Increase / decrease in Debt -0.9 3.5 -8.0 0.0 0.0 Normalised EPS (c) 5.46 7.25 9.05 11.12 Dividends paid 0.0 0.0 -16.1 -8.5 -10.5 Dividends per share (c) 5.40 6.97 8.56 Other financing cash flows -65.1 0.0 1.9 0.0 0.0 Payout ratio 74.5% 77.0% 77.0% Financing cash flows -2.2 3.5 2.8 -8.5 -10.5 Result quality Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E Balance Sheet Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E Cash flow conversion 82.5% 64.5% 82.9% 92.7% 92.3% Assets FCF vs.

NPAT 55.2% 12.8% 18.9% 73.9% 76.7% Cash And Deposits 0.0 4.6 9.1 9.0 9.2 Debtors 0.0 5.8 6.0 6.3 6.6 Inventory 0.0 35.5 41.5 47.6 54.2 Gearing Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E Other current assets 0.0 0.3 0.3 0.3 0.3 Net Debt -4.60 -9.12 -8.99 -9.23 Total Current Assets 0.0 46.2 56.9 63.2 70.3 Net Debt / Equity -5.1% -9.8% -9.4% -9.3% Fixed Assets 0.0 14.9 16.4 17.3 17.9 Net Debt / EBITDA (x) -0.37 -0.56 -0.44 -0.37 Investments 0.0 0.0 0.0 0.0 0.0 EBIT interest cover (x) 30.00 50.00 66.00 82.21 100.74 Goodwill 0.0 44.2 44.2 44.2 44.2 Invested Capital 80.0 81.6 80.9 85.1 87.9 Intangibles 0.0 2.6 2.6 2.6 2.6 Enterprise Value 270.4 265.9 266.0 265.8 Other non-current assets 0.0 0.0 0.0 0.0 0.0 Total Non-Current Assets 0.0 61.7 63.2 64.1 64.7 Growth ratios Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E TOTAL ASSETS 0.0 107.9 120.2 127.3 134.9 Revenue 19.7% 20.0% 21.3% 17.6% 17.1% EBITDA 110.5% 55.0% 31.5% 24.5% 21.5% Liabilities EBIT 215.8% 66.7% 32.0% 24.6% 22.5% Short Term Debt 0.0 0.0 0.0 0.0 0.0 NPAT 251.1% 66.6% 32.7% 24.9% 22.8% Creditors 0.0 19.7 24.9 29.8 34.8 EPS growth 24.9% 22.8% Other current liabilities 0.0 1.7 1.7 1.7 1.7 DPS growth 29.1% 22.8% Total Current Liabilities 0.0 21.4 26.6 31.5 36.5 Operating cash flow 279.7% 19.4% 3.4% 93.2% 20.6% Long Term Debt 0.0 0.0 0.0 0.0 0.0 Other Debt (inc hybrids) 0.0 0.0 0.0 0.0 0.0 Margin analysis Jun-14A Jun-15A Jun-16E Jun-17E Jun-18E Other Non curren liabilities 0.0 2.7 2.7 2.7 2.7 EBITDA Margin 5.3% 6.9% 7.5% 7.9% 8.2% Total Non -Current liabilities 0.0 2.7 2.7 2.7 2.7 EBIT margin 4.0% 5.5% 6.0% 6.4% 6.7% TOTAL LIABILITIES 0.0 26.5 29.5 34.4 39.4 NPAT margin 2.7% 3.8% 4.2% 4.4% 4.6% ROE 5.1% 7.6% 9.8% 11.9% 14.1% Equity ROIC 7.5% 12.2% 16.3% 19.3% 22.9% Issued capital 0.0 98.8 98.2 97.4 96.6 ROE less WACC -6.0% -3.5% -1.2% 0.9% 3.1% Retained earnings 0.0 -9.2 -6.4 -2.9 1.4 ROIC less WACC -3.5% 1.2% 5.3% 8.3% 11.9% Other reserves and FX 0.0 1.0 1.0 1.0 1.0 TOTAL EQUITY 81.4 90.6 92.8 95.5 99.0

Baby Bunting Group - Best of breed growth

Retail│Australia│Equity research│November 22, 2015 3 Section 1: Executive summary Company overview Baby Bunting is Australia’s largest specialty retailer of baby goods, currently operating 33 stores across Australia. Baby Bunting’s products primarily cater to parents of children from newborn to three years of age. The company procures and stocks product from a wide range of third-party brands and suppliers (in addition to private label and exclusive branded products). Baby Bunting categorises its key product categories as follows:  Softgoods (35% of sales): comprising manchester, bedding, babywear, nappies, feeding and other softgoods; and  Hardgoods (65% of sales): comprising prams, car safety, cots and nursery furniture, toys and other hardgoods.

Industry overview Baby Bunting’s estimates its current addressable market is cA$2.3bn pa, implying Baby Bunting has c7.8% market share. The market is fragmented with various small, regional players. Key competitors include other specialty baby goods retailers, department stores and online only players. Only three of Baby Bunting’s direct specialty competitors have more than three stores. We believe the industry will undergo significant change over the next decade as it shifts from a cottage industry to a few players with significant scale. Figure 2: Baby Bunting’s addressable market (A$2.3bn) Figure 3: Specialty competitive store footprint SOURCES: COMPANY REPORTS Investment thesis  A defensive but growing category (in which Baby Bunting is taking share): The baby goods industry has grown and should continue to grow at a steady rate.

Based on Baby Bunting’s historical like-for-like (lfl) sales growth, it is clear Baby Bunting has taken significant market share in recent years.

 An operator of scale in a highly fragmented industry: Baby Bunting is the largest specialty retailer of baby goods in Australia (by store numbers). Baby Bunting has invested ahead of its store footprint, which should see margins expand materially in coming years. As the only baby goods retailer of any real scale (>30 stores), Baby Bunting stores are conveniently located and highly visible. We believe the cottage nature of this industry is set to change over the next decade as the smaller operators struggle to remain viable with the largest operator on the verge of significant expansion.

Title: Source: Please fill in the values above to have them entered in your re Cots, mattresses and dressing tables Prams, bassinets, dummies, bottles Toys Car seats Clothing Nappies Other 5 10 15 20 25 30 35 Baby Bunting My Baby Warehouse Babies "R" Us Superstore Bubs Baby Kingdom Baby Co Baby Savings Parenthood

Retail│Australia│Equity research│November 22, 2015 4  Store rollout potential – it’s only just begun: There are not many listed retailers with similar levels of store footprint upside. Based on Baby Bunting’s long-term store target of 70+ stores, the group is less than 45% of the way through its rollout potential. As can be seen in the following table, not since JBH’s IPO in 2003 has a similar store growth been on offer. Most importantly, Baby Bunting has invested ahead of the curve in relation to its store rollout. We expect the company is well placed to leverage this investment in coming years.

Figure 4: Comparable IPO store rollout profiles SOURCES: MORGANS, COMPANY REPORTS  45% of existing stores are less than 3 years old: Given a Baby Bunting store typically takes around 4 years to reach maturity of sales, 45% of existing stores being less than three years old provides another opportunity for strong sales growth. This benefit will come through in lfl sales performance (providing they are comparative stores).  Replicating VIC/SA brand awareness in other states: Given the group’s heritage, the VIC store footprint and brand awareness in this state is more elevated. The group has strong first-to-mind awareness in Melbourne and Adelaide and aims to replicate this across other states like QLD and NSW.

Higher brand awareness typically has a positive impact on store sales. On average, FY15 sales of VIC and SA stores were c21% higher than stores in other states (for stores opened greater than one year).  Long-dated and strong sales growth: Due to solid lfl sales growth and significant store rollout growth, Baby Bunting’s sales are growing at strong double-digit rates (c20%), which we believe can continue in future years. We forecast a 3-year EPS CAGR of 23% (FY17-19).

 Converting to even higher earnings growth due to margin upside: We believe further GM and EBITDA upside is available as the group’s increased scale brings about better supplier trading terms, private label penetration increases and as recent investment in a fully formed overhead/support structure is leveraged. This should lead to GP/EBITDA/NPAT growth well in excess of sales growth as forecast by Baby Bunting in FY16 (21.3% sales growth, 32.1% EBITDA growth and 32.7% NPAT growth).  Net cash position and management well incentivised to deliver: Baby Bunting will be in a pro-forma net cash position of A$4.6m with nil debt (forecast at 30 June 2015).

Baby Bunting senior executives are highly incentivised to deliver strong earnings growth for shareholders over the long time. While base wages appear to be below market, if management achieves 25% EPS CAGR and TSR over five years, 4% of the group’s issued capital will be issued to senior management (we note there is a sliding scale from 15% and above). This provides a strong alignment of interests. Management owns 3.7% of issued capital and did not sell a share into the issue.

Company # stores at IPO Approximate new stores pa Long-term potential Approximate % of long-term plan JB Hi-Fi 26 >5 60-70 40% Super Cheap Auto (now Super Retail Group) 176 30 300 60% Domino's Pizza 333 40 650 50% Kathmandu 82 12-15 150 55% Dick Smith Holdings 359 30 450 80% Pet Barn (Greencross acquisition) 124 10-12 175+ 60-70% Beacon Lighting 85 6 115 70-80% Burson Group 114 10-12 175 65% Lovisa 220 20-30 290+ 75% Adairs 131 8-12 18+

Retail│Australia│Equity research│November 22, 2015 5 Key risks Baby Bunting faces a number of challenges and risks including: increased competition, deterioration in general retail conditions, supply chain interruptions, inability to secure new store locations, inability to pass on price increases due to currency impact on supplier’s cost base, failure to comply with Australian safety standards and loss of key personnel.

Company financials Baby Bunting has grown EBITDA in FY13-FY15 via the following:  Revenue growth (43% growth): primarily achieved through lfl sales growth and new store openings;  Gross margin expansion (+310bp): primarily achieved through better supplier trading terms/rebates and increased sales penetration of private label and exclusive branded sales; and  CODB margin reduction (-70bp): largely due to operating leverage on strong lfl sales outcomes.

Baby Bunting is forecasting sales growth in FY16 (+21.3%) to be similar to FY14 (+19.6%) and FY15 (+20%). This A$38.4m uplift in revenue is driven by: a 4.3% lfl sales growth assumption; partial contribution from five new stores in FY16 (A$11.8m); and a full-year impact from the eight new stores opened in FY15 (A$19.6m). This will convert to higher EBITDA growth (+32%) due to a higher GM (+80 bp). With no debt on listing, the group will be in a cA$4.6m net cash position. In FY17/18 we assume 4% lfl sales growth, six new stores, further GM expansion (although not significant) and minor operating cost leverage.

We detail Baby Bunting’s historical and FY16 prospectus forecasts and assumption below in addition to Morgans’ forecasts from FY17. Figure 5: Key financials snapshot SOURCES: MORGANS, COMPANY REPORTS Pro forma forecast Morgans forecast Morgans forecast $ millions FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Sales 125.5 150.2 180.2 218.6 257.1 300.9 Gross profit 39.1 49.9 61.9 76.8 EBITDA 3.8 8.0 12.4 16.3 20.3 24.7 EBIT 1.9 6.0 10.0 13.2 16.4 20.1 Profit before tax 1.7 5.8 9.7 12.9 16.2 19.9 Net profit after tax 1.2 4.1 6.8 9.1 11.4 13.9 Total stores 21 23 31 36 42 48 Key pro forma financial metrics Total sales growth n/a 19.6% 20.0% 21.3% 17.6% 17.1% Comparable store sales growth 1.5% 8.8% 7.6% 4.3% 4.0% 4.0% Gross profit growth n/a 27.6% 23.9% 24.1% 18.6% 17.4% Gross profit margin 31.2% 33.3% 34.3% 35.1% 35.4% 35.5% CODB as a percentage of total sales 28.2% 27.9% 27.5% 27.6% 27.5% 27.3% EBITDA growth n/a 113.6% 54.2% 32.1% 24.3% 21.7% EBITDA margin 3.0% 5.3% 6.9% 7.5% 7.9% 8.2% EBIT growth n/a 216.1% 66.4% 32.0% 24.3% 22.6% EBIT margin 1.5% 4.0% 5.5% 6.0% 6.4% 6.7% NPAT growth n/a 245.0% 69.0% 32.7% 24.9% 22.3% NPAT margin 0.9% 2.7% 3.8% 4.1% 4.4% 4.6% Pro forma historical

Retail│Australia│Equity research│November 22, 2015 6 Valuation snapshot We value Baby Bunting using a pure DCF methodology at A$2.46 per share. Figure 6: Blended valuation (A$m) SOURCES: MORGANS We believe Baby Bunting’s closest comparative peer group is other high and long-dated earnings growth companies such as: Adairs, Beacon Lighting, Burson Group, Domino’s Pizza, Greencross, Lovisa, Pacific Smiles Group, Premier Investments and RCG Corporation. Key comparable data is included in the following table.

Figure 7: Comparative company analysis Prices as at 19 November 2015. SOURCES: MORGANS, COMPANY REPORTS, FACTSET Total enterprise value (A$m) 299.41 Comprised of - Explicit cash flows (A$m) 117.97 - Terminal cash flows (A$m) 181.44 Less net debt (A$m) -9.12 Equity valuation (A$m) 308.52 Equity valution (per share) 2.46 WACC 10.55% Market risk premium 6.0% Risk free rate 4.3% Target gearing (D/D+E) 0.0% Equity beta 1.05 Long term growth rate 3.0% Last Mcap Name Price $M FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 Key comparable, high growth retailers Adairs Ltd.

2.49 413 9.6x 8.34x 15.7x 13.6x 14.4% 12.2% 18.7% 13.4% 18.7 10.2 3.8% 4.6% Beacon Lighting Group Ltd 1.87 401 12.3x 10.78x 20.6x 18.3x 16.6% 13.0% 15.7% 11.7% 6.9 0.7 2.7% 3.0% Burson Group Ltd 3.90 954 13.1x 10.90x 22.9x 18.6x 71.2% 14.0% 77.1% 19.7% 113.6 108.2 2.8% 3.5% Domino's Pizza Enterprises Limited 48.45 4,239 26.1x 20.47x 49.9x 38.8x 19.8% 16.9% 28.8% 26.1% 110.8 66.9 1.4% 1.8% Greencross Limited 6.35 725 9.6x 8.40x 16.3x 14.0x 15.4% 12.5% 16.7% 13.7% 236.7 219.8 2.3% 2.6% Lovisa Holdings Ltd. 3.20 336 9.7x 8.24x 16.9x 14.3x 8.7% 13.2% 13.7% 15.3% 4.2 (3.6) 4.1% 4.8% Pacific Smiles Group Ltd 2.24 340 14.7x 12.20x 30.1x 25.0x 14.9% 16.7% 20.3% 20.3% (3.5) (1.3) 2.0% 2.4% Premier Investments Limited 13.91 2,175 13.4x 12.09x 22.0x 19.9x 6.2% 7.1% 12.9% 10.6% (189.1) (205.5) 2.6% 2.8% RCG Corporation Limited 1.50 705 13.0x 11.21x 25.3x 21.0x 188.5% 15.1% 161.8% 14.5% 41.5 34.4 3.1% 3.7% AVERAGE 13.5x 11.4x 24.4x 20.4x 39.5% 13.4% 40.6% 16.1% 37.8 25.5 2.7% 3.2% AVERAGE Sales/EBITDA growth (excluding Burson & RCG given recent large acquisitions) 13.2% 17.8% AVERAGE Multiples (excluding outlier Domino's Pizza) 11.9 10.3 21.2 18.1 2.9% 3.4% Baby Bunting 16.30 13.10 30.20 24.20 21% 18% 31.5% 24.5% -4.60 -9.00 2.5% 3.2% Other, low growth domestic retailers Dick Smith Holdings Limited 0.73 173 3.2x 3.14x 4.6x 4.7x 4.7% 3.1% -7.1% 0.8% 50.8 54.1 9.5% 9.9% Fantastic Holdings Limited 2.39 247 7.4x 6.64x 15.7x 13.6x 7.3% 6.4% 17.5% 11.8% (30.6) (31.1) 3.6% 4.0% Kathmandu Holdings Limited 1.53 308 6.2x 5.46x 11.2x 9.8x 11.1% 7.1% 36.6% 10.7% 59.4 49.6 6.1% 6.7% JB Hi-Fi Limited 18.62 1,841 7.6x 7.09x 12.7x 11.9x 5.7% 6.0% 5.1% 5.9% 68.5 36.3 5.1% 5.4% Nick Scali Limited 4.18 339 9.7x 8.76x 15.9x 14.5x 18.7% 10.4% 25.5% 10.8% (2.3) (8.8) 3.1% 3.5% Orotongroup Limited 2.57 105 8.1x 7.42x 22.6x 17.6x 2.6% 6.3% 8.6% 9.0% 6.1 5.8 1.9% 2.6% Reject Shop Limited 11.22 324 6.7x 6.25x 17.7x 15.8x 5.2% 4.5% 14.5% 7.4% (14.0) (24.8) 2.5% 3.0% Super Retail Group Limited 10.28 2,027 9.2x 8.11x 16.5x 14.6x 5.8% 7.9% 13.4% 10.4% 367.7 309.1 4.3% 4.8% AVERAGE 7.3x 6.6x 14.6x 12.8x 7.6% 6.5% 14.3% 8.4% 63.2 48.8 4.5% 5.0% EV/EBITDA P/E Sales growth (%) EBITDA growth (%) Net debt ($m) Yield

Retail│Australia│Equity research│November 22, 2015 7 Section 2: Why Mothercare failed Mothercare Australia (a listed Australian company in which Mothercare UK was a major shareholder) went into administration in early 2013. At the time, the group sold baby and parenting products and toys across three brands: Early Learning Centres, Kids Central and Mothercare. The group comprised 43 stores and employed 563 staff (of which 77% were employed on a casual or part time basis). Mothercare acquired Babies Galore for A$8.8m (plus A$1m of contingent liabilities) in September 2010.

The group suffered significant losses of A$21m in FY11, A$12m in FY12 and A$7.3m in 1H13.

These losses dramatically impacted the cash flow and trading of the business, with lack of available finance. At the date of voluntary administration, rent of some stores was two months in arrears and suppliers were demanding changes to payment terms to curb their exposure. Figure 8: Mothercare lfl sales growth (%) Figure 9: Mothercare GM – Own-Brand vs Third Party SOURCES: IRESS SOURCES: COMPANY REPORTS The receiver attributed Mothercare’s ultimate failure in Australia to:  Accelerated expansion (including acquisitions) of the Mothercare Group funded by injection of capital;  Expansion not supported by increased levels of sales;  Failure to consolidate sales of own branded (private label) products that have a much higher GP margin than third-party brands;  Failure to minimise the level of fixed costs and achieve economies of scale following the expansion; and  Failure to complete the sale of business to Myer Family Holdings, which, in the directors’ opinion, would have resulted in improved economies of scale and a return to profit.

It is clear that Mothercare modelled its growth around acquisitions rather than organic rollout. They also had some issues with customising northern hemisphere product to suit Australian safety standards and seasonality of stock versus the UK. The business was also highly focused on apparel and fashion. Rental costs were high as a % of sales and store formats were inconsistent. Mothercare has traditionally focused primarily on its own brands; however, the group found it also needed to stock national brands in Australia which saw margins fall short of targets quickly.

-25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 0% 10% 20% 30% 40% 50% 60% 70% 80% Total GP% - OB Total GP% - TP Linear (Total GP% - OB) Linear (Total GP% - TP)

Retail│Australia│Equity research│November 22, 2015 8 We believe Baby Bunting is largely quarantined from these issues due to its focused organic growth strategy, consistent store format, dominant offering of national brands and significantly broader product range. What if another major chain failed? The domestic baby goods industry has seen many chains (mostly small with the exception of Mothercare) fold over the years. We expect this thematic will continue and perhaps even intensify as the likes of Baby Bunting dramatically increase their store footprints and leverage supplier power via scale.

If one of Baby Bunting’s major competitors (eg My Baby Warehouse) were to close down, we expect there would be a short-term negative impact on Baby Bunting’s sales as inventory is cleared at irrational prices. Following Mothercare being placed into administration, Baby Bunting’s lfl sales were just 2%. However, in the medium-long term there would be a substantial upside opportunity for Baby Bunting to take more share of the market. We expect the market would understand such a scenario playing out and that any short-term negative impact would be more than offset by the longer-term market share opportunity.

Retail│Australia│Equity research│November 22, 2015 9 Section 3: Company overview Baby Bunting is Australia’s largest specialty retailer of baby goods, operating 33 stores across Australia and an online store. The company also has a long- term target of reaching over 70 stores. Baby Bunting’s business model centres around the sale of third-party produced and branded baby goods in addition to private label and exclusive products (c7.2% of sales). Figure 10: Store network Figure 11: Private label and exclusive products as a % of sales SOURCES: MORGANS, COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS Baby Bunting differentiates itself in the fragmented Australian baby goods market through a combination of: 1.

Scale: Benefits of the widest product offering, in-stock and available, a conveniently located store network (33) with a consistent format, and competitively priced (price match guarantee).

2. Superior service: Baby Bunting operates a customer-centric culture with a dedicated team of well trained and knowledgeable staff to service customer’s individual needs. Additional services include: lay-by, car seat fitting, parenting rooms and gift registries. 3. National pricing policy and price match guarantee: Baby Bunting’s scale enables it to maintain every day low prices and deliver customers a national pricing policy backed by a price match guarantee. 4. Widest product range (in-stock) and additional services: Baby Bunting offers over 6,000 products in its stores which the company believes to be the widest range compared to competitors.

Additionally, the group’s extensive DC allows for its product range to be in-stock and available at the time of customer purchase. The business also provides additional services to its customers including: lay-by, car-seat fitting; parenting rooms; and an in-store/online gift registry. These competitive advantages have seen the group attract a very strong Net Promoter Score (NPS) of 40 (based on a national customer survey in early 2015 that included more than 15,000 responses).

Baby Bunting’s senior management team, led by CEO and MD Matt Spencer, has a track record of delivering strong financial performance and growth. The company has achieved three-year compound annual growth in sales and EBITDA of 19.8% and 82.7% to FY15. Title: Source: Please fill in the values above to have them entered in your re 9 12 15 19 21 23 31 36 5 10 15 20 25 30 35 40 FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16F +27 stores 2.0% 3.1% 5.0% 7.2% 10.0% 0% 2% 4% 6% 8% 10% 12% FY12A FY13A FY14A FY15A Medium term target

Retail│Australia│Equity research│November 22, 2015 10 Figure 12: Examples of Baby Bunting stores SOURCES: COMPANY REPORTS

Retail│Australia│Equity research│November 22, 2015 11 Section 4: Industry overview Australian baby goods industry: large, growing, resilient One of the largest growing success stories of the past few years has been the rise of baby goods in Australia – a shopping trend spurred by growth in population, parents demanding the best for their children and the rapid rise in the baby luxury market. Baby Bunting estimates the Australian baby goods market, including food and consumables, has current annual sales of cA$5bn pa. The portion of this which is addressable by Baby Bunting is estimated to be cA$2.3bn.

Figure 13: Baby Bunting's addressable market SOURCES: COMPANY REPORTS The key demand drivers in this industry include: 1. Number of births and population: The number of births and changes in population have exhibited stable and consistent growth over the last ten years, supporting the growth of this industry. The number of births in Australia has grown at a CAGR of 2.1% over the past ten years to 2013 (with 308,000 newborns in 2013). This compares to the total Australian population growing at a 1.6% CAGR over the same period. ABS projections indicate both the total number of births and population will grow steadily over the long term.

Figure 14: Number of births and total population in Australia Figure 15: Forecast number of births and population in Australia SOURCES: MORGANS, COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS Cots, mattresses and dressing tables Prams, bassinets, dummies, bottles Toys Car seats Clothing Nappies cA$2.3bn pa Title: Source: Please fill in the values above to have them entered in your re -2.0 3.0 8.0 13.0 18.0 23.0 28.0 33.0 200,000 220,000 240,000 260,000 280,000 300,000 320,000 340,000 360,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 New Births - LHS Estimated resident population (M) - RHS 21.0 22.0 23.0 24.0 25.0 26.0 27.0 28.0 29.0 200,000 220,000 240,000 260,000 280,000 300,000 320,000 340,000 360,000 1 2 3 4 5 6 7 8 9 10 11 New Births - LHS Estimated resident population (m) - RHS

Retail│Australia│Equity research│November 22, 2015 12 2. Household disposable income: Consistently growing household disposable income, coupled with the trend towards women having children later in life when they are more financially secure are both supportive of industry growth. It can easily be argued that a fair portion of Baby Bunting’s products are less discretionary in nature (essential items such as car seats, prams, cots). 3. General economic conditions: While macro economic conditions and consumer confidence has been patchy domestically over the past few years, Baby Bunting has produced strong lfl sales growth.

The Australian baby goods industry appears extremely attractive in that it is highly fragmented (large number of small, specialty players), the number of births continues to grow and strict Australian mandatory product safety standards provide strong barriers to entry.

Key competitors - specialties, department stores and online We estimate Baby Bunting has a c7.8% share of the Australian baby goods market. The group’s key competitors include: 1. Specialty baby goods retailers: There is a large number of businesses with small scale (typically family owned and have a small number of stores that compete in localised areas). As can be seen below, Baby Bunting has the largest store network in Australia by some margin which provides various benefits, including power with suppliers, increased brand recognition and loyalty and convenient store locations. Key competitors include: My Baby Warehouse, Babies “R” Us and Bubs.

Figure 16: Specialty baby goods retailers in Australia - As at September 2015 SOURCES: MORGANS, COMPANY REPORTS 2. Department stores: David Jones and Myer. 3. Discount department stores: Big W, Target and Kmart. Specialties are winning share from this channel, in our view.

4. Online-only retailers. Australian safety standards provide a credible barrier to entry: The baby goods market is subject to strict Australian product safety standards across Baby Bunting’s core categories. In particular, these regulations add significant complexity for any potential international entrants into the market. 33 21 13 7 3 3 3 3 5 10 15 20 25 30 35 Baby Bunting (VIC, NSW, QLD, SA, WA, ACT) My Baby Warehouse (NSW, QLD, WA) Babies "R" Us Superstore (VIC, NSW, QLD, SA, WA, ACT) Bubs (QLD, NSW) Baby Kingdom (NSW) Baby Co (VIC) Baby Savings (NSW) Parenthood (VIC)

Retail│Australia│Equity research│November 22, 2015 13 Section 5: Key growth drivers Baby Bunting has a record of strong growth since 2009.

Over this period (to FY15), the group has increased the number of stores from 9 to 33 and sales from A$49.8m to A$180.2m. Baby Bunting’s growth strategy is simple in that it’s the typical retail growth blueprint (store rollout + lfl sales growth + margin upside from scale and private label penetration). However, what’s different about it is that the growth is very much in its infancy, especially in terms of the store rollout. More specifically, Baby Bunting’s future growth will be underpinned by: 1. Growth from existing stores and online; 2. Significant new store rollout; and 3. EBITDA margin improvement.

Growth from existing stores and online Baby Bunting expects to be able to deliver increased revenue via improvements to its existing store portfolio and operations. The portfolio is continuously assessed against optimum size, format, fit-out and merchandising criteria. Baby Bunting has delivered average comparable store sales growth of c4.8% pa over the 6 years to June 2015. Baby Bunting's store network includes a significant proportion of “immature” stores, with 45% of stores less than three years old as at June 2015.

Baby Bunting stores historically take four years to mature and have stronger comparable store sales growth in the first four years of operation. As a result, the maturity of newer stores should support further growth in comparable store sales. Baby Bunting’s management team has identified a number of strategies to allow existing stores and online to capture greater market share. Key strategies include:  Growing brand awareness: Baby Bunting has very strong first-to- mind awareness in Melbourne and Adelaide and aims to replicate this brand recognition across other areas of Australia, with a particular focus on QLD and NSW.

Higher brand awareness has typically had a positive impact on store sales. On average, in FY15 sales of Victorian and South Australian stores (excluding stores open less than 1 year at FY15) were 21% higher than stores in other states and territories.  Improved customer experience: Baby Bunting intends to invest in customer programs, in-store technology and remodel the loyalty program as a key differentiator to comparable peers. Investments in online capabilities including a website re-skin and features such as click and collect to further improve the omni-channel customer experience. Baby Bunting is also looking to leverage customer analytics to drive highly targeted digital marketing based on its unique knowledge and insights to a parent’s product needs through their baby’s early life stages.

This will be enabled by an investment in 2016 in improved CRM functionality.

 Online: Growing Baby Bunting’s online penetration will be a key future driver of growth given the size of the market, potentially higher associated margins and higher customer loyalty. We see significant opportunities to enhance and develop the existing online site in addition to other opportunities that have been identified by management, but not yet initiated nationally. Online sales were approximately equal to that of an average sized store in Baby Bunting’s network in FY2015 (c3.5% of sales). We expect Baby Bunting’s online penetration may not reach levels of its peer group in time given the

Retail│Australia│Equity research│November 22, 2015 14 more speciality nature of Baby Bunting’s product and the importance of in-store service.  The group’s website continues to improve based on key performance indicators (growth in website sessions and improving sales conversion - +38% in FY15).  The group is currently developing a platform to make click and collect functional in FY16. Combined with investment in a new CRM, there is clearly an opportunity for the company to realise further efficiency gains as scale increases.

Significant new store rollout Baby Bunting plans to grow its store network from the current level of 33 to over 70 stores in the long term and plans to roll out 4 to 8 new stores pa with five new stores in FY16.

This provides store upside of c120% - the highest level of footprint upside in the domestic retail sector. The pipeline of identified site opportunities is split approximately 60% major markets (population >200,000) and 40% regional locations. Management has noted that regional sales per store are expected to be c40-60% of a metro store’s sales (after four years of operation). Baby Bunting appears comfortable with this level of rollout in order to ensure the right locations are sourced and in order to maximise the estimated ROIC from each new store.

In 2009, Baby Bunting developed a national store network plan which included developing a better understanding of catchment demographics to help identify priority locations for new stores. This network plan was refreshed in 2012 and 2014. Given stores are large format and destination style, new store rollout can result in cannibalisation of existing stores (particularly in more highly penetrated markets like VIC). Cannibalisation of comparative stores is included in the lfl sales growth outcome. Margin improvement There is further GM and EBITDA margin upside available as the group’s increased scale brings about better supplier trading terms, increases its private label product sales penetration and as recent investment in a fully formed overhead/support structure (including the DC) is leveraged.

This should lead to GP/EBITDA/NPAT growth well in excess of sales growth as forecast by Baby Bunting in FY16 (21.3% sales growth, 32.1% EBITDA growth and 32.7% NPAT growth).

 GM improvement: In recent years, Baby Bunting has invested significantly in its capabilities to improve its GM, including: investment in the buying team (doubled the size of the team over the past three years to 16 people), development of better supplier relationships and trading terms; improved range and product mix; expanded private label and exclusive products range; and investment in the DC to improve stock control and deliver procurement efficiencies. All these margin drivers are expected to deliver further benefits in FY16 as forecast in Baby Bunting’s prospectus.  Private label and exclusive products currently represent c7.2% of sales and the company believes a realistic target is c10% in the medium term.

Increased % of sales from this category will support GM expansion in the future.

 Leveraging the group’s investment in its support office and DC: Baby Bunting has invested significantly in its Support Office (IT, HR, Finance, Marketing, Operations, Merchandise, Logistics) and DC in recent years. This has been in anticipation of a significant store rollout and in order to support best practice. Between FY13 and FY16, Support Office and DC expenses increased from A$7.5m to A$12.5m as a result of this investment. Total Support Office/DC headcount has increased from 45 to 77 over this time.

Retail│Australia│Equity research│November 22, 2015 15 Section 6: Company financials Baby Bunting has achieved rapid growth in recent years, with revenue growing from A$125.5m in FY13 to A$180.2m in FY15 (and A$218.6m forecast in FY16) – a 20% CAGR.

Baby Bunting has provided pro-forma financial P&L history from FY13-FY15, in addition to pro-forma and statutory FY16 forecasts. The pro-forma accounts assume the group is listed for a full 12-month period. Figure 17: Historical and forecast pro-forma income statement SOURCES: COMPANY REPORTS * This store was compulsorily acquired by the NSW Government **This store was re-located Profit & loss commentary Revenue Historical revenue growth has largely been achieved through lfl sales growth and store network expansion. Revenue is forecast by Baby Bunting to increase from A$180.2m in FY15 to A$218.6m in FY16 (+21%), underpinned by: 1) lfl sales growth (+4.3%); 2) annualisation of new stores opened during FY15 (A$19.6m); and 3) new store openings in FY16 (A$11.8m contribution).

The total store portfolio is forecast to reach 36 by the end of FY16 (31 at End-June 2015 and 33 currently).

Like-for-like (lfl) sales growth: As is the case for any retailer, lfl sales growth is the key indicator of top-line performance. At 30 June 2015, Baby Bunting had 21 comparative stores (operated for over 12 months and for the full financial year). It expects the number of comparative stores will increase to 24 in FY16. Pro forma historical Pro forma forecast Statutory forecast $ millions FY2013 FY2014 FY2015 FY2016 FY2016 Sales 125.5 150.2 180.2 218.6 218.6 Cost of sales (86.4) (100.2) (118.3) (141.8) (141.8) Gross profit 39.1 49.9 61.9 76.8 76.8 Cost of doing business: Store expenses (25.7) (30.4) (36.0) (43.8) (43.8) Marketing expenses (2.2) (2.5) (3.1) (4.0) (4.0) Warehouse expenses (2.5) (3.1) (3.2) (3.5) (3.5) Administrative expenses (5.0) (5.9) (7.3) (9.1) (11.9) EBITDA 3.8 8.0 12.4 16.3 13.5 Depreciation and amortisation (1.9) (2.0) (2.4) (3.1) (3.1) EBIT 1.9 6.0 10.0 13.2 10.4 Net finance costs (0.2) (0.2) (0.2) (0.2) (0.3) Profit before tax 1.7 5.8 9.7 12.9 10.1 Tax (0.5) (1.7) (2.9) (3.9) (3.8) Net profit after tax 1.2 4.1 6.8 9.1 6.2 Retail Stores Major market stores 21 23 29 34 Regional stores - - 2 2 Total 21 23 31 36 Store openings 3 3 8 5 Store closures 1* 1 - Net new stores 2 2 8 5 Key pro forma financial metrics Total sales growth n/a 19.6% 20.0% 21.3% Comparable store sales growth 1.5% 8.8% 7.6% 4.3% Gross profit growth n/a 27.6% 23.9% 24.1% Gross profit margin 31.2% 33.3% 34.3% 35.1% CODB as a percentage of total sales 28.2% 27.9% 27.5% 27.6% EBITDA growth n/a 113.6% 54.2% 32.1% EBITDA margin 3.0% 5.3% 6.9% 7.5% EBIT growth n/a 216.1% 66.4% 32.0% EBIT margin 1.5% 4.0% 5.5% 6.0% NPAT growth n/a 245.0% 69.0% 32.7% NPAT margin 0.9% 2.7% 3.8% 4.1%

Retail│Australia│Equity research│November 22, 2015 16 Baby Bunting’s average lfl sales growth for the six years to 30 June 2015 has been c4.8% pa, although has been somewhat volatile within this period as can be seen in the following chart. Lfl sales growth was below trend in FY11 and FY13. In FY11, the group had just 10 comparative stores (vs total of 15 stores). Seven of these stores were located in VIC and with the addition of two new stores in this state in one year, the rates of cannibalisation were quite high. In FY13, the soft lfl sales growth was largely due to Mothercare going into receivership and the heavy liquidation of stock that ensued (which impacted Baby Bunting’s sales in this year for obvious reasons).

Lfl sales growth was very strong in FY14 and FY15, up 9% and 8%, respectively. The company is forecasting FY16 lfl sales growth of 4.3%. We note Baby Bunting’s lfl sales growth is reported net of cannibalisation. Figure 18: History of lfl sales growth SOURCES: COMPANY REPORTS Future drivers of Baby Bunting’s lfl sales growth, include: growing brand awareness in underpenetrated regions; investment in customer programs and in-store technology; investment in online capabilities; additional store features such as click and collect; remodelling of the loyalty program; customer analytics to drive targeted digital marketing enabled by investment in CRM; continued improvement of in-stock position; and investment in training/in-store support.

New store rollout and maturation of existing stores: As a result of rapid growth in recent years, Baby Bunting’s store network includes a significant proportion of “immature” stores. As at 30 June 2015, 45% of stores were less than three years old. Stores typically take four years to mature and have stronger lfl sales growth in the first four years of operation. Therefore, the maturity of new stores should further support sales growth in comparable stores. 6% 1% 4% 2% 9% 8% 4% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% FY10A FY11A FY12A FY13A FY14A FY15A FY16F

Retail│Australia│Equity research│November 22, 2015 17 Figure 19: Store maturity profile Figure 20: New store economics SOURCES: MORGANS, COMPANY REPORTS SOURCES: COMPANY REPORTS Baby Bunting plans to open five new stores in FY16, which are expected to generate partial year contributions of cA$11.8m.

Additionally, the full-year incremental contribution from the eight stores opened in FY15 is expected to be cA$19.6m. From 31 stores at end-June 2015 and 33 stores currently, Baby Bunting believes there is an opportunity to grow the network to over 70 stores in the long term. This provides over 125% upside to Baby Bunting’s current footprint, a significant growth opportunity (particularly compared to domestic retail peers). Figure 21: History of new store rollout (including FY16 and long term target) SOURCES: COMPANY REPORTS Gross profit margin (GM) Baby Bunting’s GM has increased from 31.2% in FY13 to 34.3% in FY15 and is forecast by Baby Bunting to increase again in FY16 to 35.1%.

Baby Bunting’s GM has expanded significantly in recent years due to: scale (better supplier trading terms, agreements and rebates); increased private label/exclusive product sales (up from 3.1% in FY13 to 7.2% in FY15); and some product mix changes (eg higher % of sales from toys/manchester which are high margin categories).

Management noted that the GM for private label and exclusive product sales can be up to 15% higher than comparable third-party branded product. Baby Bunting forecasts further GM improvement in FY16 (+80bp), underpinned by: further growth in private label/exclusive product sales; and product mix changes. Title: Source: Please fill in the values above to have them entered in your report < 3 years 45% 3 - 5 years 19% > 5 years 36% Group average (all stores opened < 4 years) Year 1 Year 2 FY15A Revenue per store (A$m) 4.9 5.6 7.5 EBITDA per store (A$m) 0.3 0.5 1.1 Store EBITDA margin 6.40% 8.40% 14.90% ROIC ~25% ~35% >70% New BB stores (opened from 2008) 10 20 30 40 50 60 70 80 FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16F Network plan

Retail│Australia│Equity research│November 22, 2015 18 Figure 22: Gross margin – historical and forecast Figure 23: Private label/exclusive sales (% of revenue) SOURCES: COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS Unlike most of its peers, only 10% of Baby Bunting’s COGS are sourced in foreign currency (largely in USD). However, a weakening AUD will still have some impact given domestic suppliers to Baby Bunting (who largely source goods in USD) will potentially pass on their higher costs to the group. In its prospectus, Baby Bunting notes that the group has historically demonstrated an ability to pass on price increases without negatively affecting sales or gross profit margin performance.

Operating expenses Baby Bunting’s key operating cost lines include the following:  Store expenses (lease costs, labour and other store expenses): have increased in recent years, largely in line with the increased store network. In FY16, Baby Bunting forecasts store expenses to increase to A$43.8m (+21.7%), primarily due to the opening of five new stores and the full year impact of stores opened in FY15. Store expenses as a % of sales are expected to increase by 0.1% to 20.1%. Expenses of comparable stores relative to sales are expected to remain steady on FY15.  Marketing expenses: have traditionally been quite low as a % of sales (c2%).

This is much lower than its domestic retail peers and is backed up by Baby Bunting’s most successful marketing tool being word of mouth. In FY16, Baby Bunting forecasts marketing expense to increase by 31.5% to A$4m (and representing 1.8% of sales vs 1.7% in FY15). This increase is largely driven by increased catalogue volume due to new store catchments, promotional support for new stores and an investment in digital media.  Warehouse expenses: are forecast to increase by 8.5% to A$3.5m due to expense inflation and additional labour required to service an anticipated volume uplift through the DC for more stores on the ground.

However, as a % of sales, this expense item is expected to fall (from 1.8% to 1.6%) due to leverage of the DC expense base relative to store network expansion.  Administration expenses: are forecast to increase 25% to A$9.1m due to further investment in the group’s support office, primarily reflecting the full year impact of expanded HR and IT functions and additional resources in the merchandise and customer contact functions. As a % of sales, this expense line is forecast to increase to 4.16% from 4.05%. Overall, Baby Bunting’s operating expenses are forecast to grow at a higher rate than revenue in FY16.

31.20% 33.30% 34.30% 35.10% 35.40% 35.50% 29.00% 30.00% 31.00% 32.00% 33.00% 34.00% 35.00% 36.00% FY13A FY14A FY15A FY16F FY17F FY18F 2.0% 3.1% 5.0% 7.2% 10.0% 0% 2% 4% 6% 8% 10% 12% FY12A FY13A FY14A FY15A Medium term target

Retail│Australia│Equity research│November 22, 2015 19 Figure 24: CODB breakdown - FY16F Figure 25: CODB % of sales Figure 26: Revenue growth vs CODB growth SOURCES: COMPANY REPORTS SOURCES: COMPANY REPORTS SOURCES: COMPANY REPORTS EBITDA/EBIT and margins Baby Bunting’s EBITDA and EBIT margins have moved around in recent years and off a low base as the group has increased its scale (invested ahead of the curve).

Baby Bunting forecasts the EBIT margin to increase by 50bp to 6% in FY16 due to above mentioned GM margin expansion, partially offset by operating costs growth at a slightly higher rate than sales. Figure 27: EBITDA and EBITDA margin Figure 28: EBIT and EBIT margin SOURCES: MORGANS, COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS Depreciation and amortisation Baby Bunting’s store capex is depreciated on a straight line basis over between 3 and 10 years. Support and DC capex is depreciated over the useful life which is typically between 3 and 10 years. Baby Bunting’s FY16 depreciation expense is based on existing rates of depreciation, adjusted for planned capex.

Net interest The prospectus forecasts a net interest expense of A$0.2m in FY16 (steady on FY15). Partial proceeds from the IPO were used to extinguish the group’s entire debt position (cA$8m).

Tax expense Prospectus forecasts assume A$3.9m in income tax expense for FY16 based on an effective tax rate of 30%. Title: Source: Please fill in the values above to have them entered in your report Store expenses, 72.5% Warehouse expenses, 5.8% Marketing expenses, 6.6% Admin expenses, 15.1% Title: Source: Please fill in the values above to 28.20% 27.90% 27.50% 27.70% 27.0% 27.2% 27.4% 27.6% 27.8% 28.0% 28.2% 28.4% FY13A FY14A FY15A FY16F 19.6% 20.0% 21.3% 18.4% 18.4% 22.2% 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% FY14A FY15A FY16F Revenue growth CODB growth Title: Source: Please fill in the values above to have them entered in your re 3.8 8 12.4 16.3 3.0% 5.3% 6.9% 7.5% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2 4 6 8 10 12 14 16 18 FY13A FY14A FY15A FY16F EBITDA (A$m) - LHS EBITDA Margin - RHS 1.9 6 10 13.2 1.5% 4.0% 5.5% 6.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 2 4 6 8 10 12 14 FY13A FY14A FY15A FY16F EBIT (A$m) - LHS EBIT Margin - RHS

Retail│Australia│Equity research│November 22, 2015 20 FX – hedging policy With a majority of the group’s COGS being sourced in AUD, the company does not hedge foreign currency. Sensitivity analysis on FY16 forecasts In its prospectus, Baby Bunting provided the following sensitivity analysis on its FY16 NPAT forecast of A$9.1m (subject to specific variables). The changes to the key variables are set out below. As can be seen, Baby Bunting’s earnings are most sensitive to a change in lfl sales growth and the GP margin. It should be noted that the analysis treats each assumption in isolation.

Figure 29: Sensitivity analysis on FY16 prospectus forecasts SOURCES: MORGANS, COMPANY REPORTS (a) The full year impact of an increase or decrease in comparable store sales growth in relation to retail and online of 1.0% relative to that assumed in the FY2016 forecast revenue. The sensitivity assumes FY2016 gross profit margin to be constant on change in Sales Revenue.

(b) Impact on FY2016 NPAT of a change in store opening dates by one month, assuming all 5 retail stores forecast to be opened in FY2016 open a month early or are delayed by a month. The sensitivity is based on an average monthly site contribution across the entire portfolio of retail stores. (c) Full year impact of an increase or decrease in the Group’s gross profit margin by 25 basis points. Dividend policy The Directors’ dividend policy will target an annual payout ratio of 70-100%, weighted 40%/60% 1H/2H. Baby Bunting expects to pay a 5.4c fully franked dividend in FY16, which equates to a 75% payout ratio.

Cashflow comments Baby Bunting’s pro-forma historical and forecast operating cash flow is set out below. The key variable to operating cash flow (aside from earnings) is working capital.

Baby Bunting is forecasting net cash flow of A$3.8m in FY16. This comprises EBITDA, a A$0.9m increase in working capital (inventory investment), capex of A$5.4m, net interest of A$0.2m and tax of A$6.1m. New store capex is forecast at A$2.8m in FY16 reflecting the planned opening of five new stores. This figure is well down from FY15 (-43%) on a lower store rollout assumption (5 vs 8 in FY15). All other capex is forecast at A$2.6m (up from A$1.2m in FY15) with the increase reflecting store refurbishments (A$2m) and IT initiatives including the re-design of the website, click and collect capabilities, CRM and a learnings management software of approximately A$0.6m.

The statutory forecast of operating cash flow in FY16 (A$4.7m vs A$3.8m Pro- forma) includes a A$16m pre-IPO dividend to existing shareholders. A$3.5m of IPO costs, A$0.1m associated with the timing of the debt pay-down, A$8m reduction in debts, A$25m of proceeds from the IPO, A$3.7m from exercise of existing share option plans and A$0.1m of listing costs (timing). FY2016 pro forma NPAT Assumption Increase / Decrease Impact ($ million) Comparable Store Sales Growth (a - 1.0% +0.4 / -0.4 Timing of new store openings (b - 1 month +0.1 / -0.1 Gross profit margins (c - 25 bps +0.4 / -0.4

Retail│Australia│Equity research│November 22, 2015 21 Figure 30: Pro-forma and statutory historical and forecast cash flow SOURCES: COMPANY REPORTS (a) Movement in working capital comprises inventories, lay-by and other receivables, trade payables, accruals, employee entitlement provisions and operating lease adjustments (accounting and cash timing differential).

(b) Capital expenditure (excluding new stores) comprises investment to acquire or maintain store, warehouse and support office fixed assets. (c) Transaction costs represent anticipated costs capitalised to Issued capital in relation to the issue of New Shares by the Company under the Offer. Transaction costs attributable to the sale of the Existing Shares have been assumed in the FY2016 statutory forecast consolidated statement of profit or loss.

(d) Dividends represent the special dividend anticipated to be paid to the Selling Shareholders prior to or at the date of the Offer. Baby Bunting’s operating cash flow will be strong in FY16F following an intense period of gearing up (inventory) for a larger store network. FY15, in particular, suffered from a A$4.6m increase in working capital associated with an accelerated store rollout and increase in lay-by receivables due to increased sales. We expect cash conversion will improve markedly moving forward as the group builds scale.

Figure 31: Historical and forecast Op. cash flow conversion SOURCES: COMPANY REPORTS Balance sheet Baby Bunting boasts a clean balance sheet with a pro-forma net cash position as at 28 June 2015 of A$4.6m (with all A$8m of previous debt paid down with proceeds from the IPO).

The group has A$44.2m of goodwill on the balance sheet (we assume this came about in FY09 when the consortium of private investors purchased its stake from the Nadelman family given no acquisitions Pro forma forecast Statutory forecast $ millions Notes FY2013 FY2014 FY2015 FY2016 FY2016 EBITDA 3.8 8.0 12.4 16.3 13.5 Add back non-cash share based payments 0.2 0.2 0.2 0.2 1.0 Add back loss/(gain) on disposal of assets (0.1) 0.1 (0.0) - - Movement in working capital (a) (1.7) (1.4) (4.6) (0.9) (0.9) Operating cash flow (before capital expenditure) 2.2 6.9 7.9 15.5 13.6 Capital expenditure (excluding new stores) (b) (0.8) (1.6) (1.2) (2.6) (2.6) Operating cash flow (before new store capital expenditure) 1.4 5.2 6.7 13.0 11.0 New store capital expenditure (1.8) (1.9) (4.8) (2.8) (2.8) Net cash flow (before financing and tax) (0.4) 3.3 1.9 10.2 8.3 Income tax (6.1) (6.1) Net interest (0.2) (0.3) Proceeds from the Offer 25.0 Proceeds from the exercise of existing share options 3.7 Repayment of borrowings (8.0) Transaction costs (capitalised) (c) (1.8) Dividends (d) (16.1) Net cash flow 3.8 4.7 Pro forma historical 57.7% 85.6% 63.8% 93.7% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% - 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 FY13A FY14A FY15A FY16F EBITDA (A$m) - LHS Operating CF conversion % (OCF b/f tax/EBITDA) - RHS

Retail│Australia│Equity research│November 22, 2015 22 have been made). Total provisions (current and non-current) of A$2m relate to employee benefit entitlements. Inventory at balance date will move in line with store growth (new stores require a net inventory investment of A$0.5-0.7m per store). Payables/creditors primarily reflect future supplier payments while receivables include lay-bys. Figure 32: Pro forma consolidated historical balance sheet as at 30 June 2015 SOURCES: COMPANY REPORTS (a) The Cash and cash equivalents adjustment of $1.0 million reflects: - proceeds from the Offer ($25.0 million); - proceeds from the exercise of existing share options in FY2016 prior to the date of the Offer ($3.7 million).

- repayment to nil of the Existing Banking Facilities ($8.0 million); - payment of a special dividend intended to be paid prior to or at completion of the Offer to the Selling Shareholders ($16.1 million); and - payment for transaction costs associated with the Offer ($3.6 million). (b) The Deferred tax asset adjustment of $0.5 million reflects the recognition of the tax effect of transaction costs associated with the Offer.

(c) The Trade and other payables adjustment of $0.1 million reflects the recognition of costs and GST recoverable associated with the transaction costs. (d) The Borrowings adjustment of $8.0 million reflects the repayment to nil of the Existing Banking Facilities. (e) The Issued capital adjustment of $27.5 million reflects: - capital raised from the issuance of new shares from the Offer ($25.0 million) and the exercise of existing share options ($3.7 million); partially offset by: - transaction costs associated with the Offer ($1.2 million) capitalised to Issued capital (f) The Retained earnings adjustment of $18.1 million reflects: - payment of a special dividend to the Selling Shareholders ($16.1 million); and - recognition of costs relating to exercise of the existing share options and transaction costs associated with the Offer anticipated to be recorded in the FY2016 statutory forecast consolidated statement of profit or loss ($2.0 million).

Banking facilities Baby Bunting currently has a A$26m Facility Agreement with NAB, maturing on 31 December 2017 comprising: 1) a A$20m cash advance/accommodation bill facility; 2) A$6m bank guarantee facility; and 3) a A$2m letter of credit facility. The banking facility has two key covenants which are tested quarterly:  Operating leverage ratio 1.5x (EBITDA + rent / interest paid + rent). We cannot calculate Baby Bunting’s current FCC ratio given no Audited Pro forma Pro forma $ millions Notes 28-Jun-15 adjustments 28-Jun-15 Current assets Cash and cash equivalents (a) 3.6 1.0 4.6 5.8 - 5.8 Inventories 35.5 - 35.5 Other assets 0.3 - 0.3 Total current assets 45.2 1.0 46.2 Non-current assets 14.9 - 14.9 Deferred tax assets (b) 2.1 0.5 2.6 Goodwill 44.2 - 44.2 Non-current assets 61.2 0.5 61.7 Total assets 106.3 1.5 107.9 Current liabilities Trade and other payables (c) 19.6 0.1 19.7 Provision for income tax 2.2 - 2.2 Provisions (employee benefit entitlements) 1.9 - 1.9 Total current liabilities 23.7 0.1 23.8 Non-current liabilities Borrowings (d) 8.0 (8.0) - Provisions (employee benefit entitlements) 0.3 - 0.3 Operating lease adjustment 2.4 - 2.4 Total non-current liabilities 10.6 (8.0) 2.7 Total liabilities 34.3 (7.8) 26.5 Net assets 72.0 9.4 81.4 Equity Issued capital (e) 55.1 27.5 82.6 Reserves 1.0 - 1.0 Retained profits (f) 16.0 (18.1) (2.2) Total equity 72.0 9.4 81.4 Other receivables Plant and equipment

Retail│Australia│Equity research│November 22, 2015 23 disclosure around the specific rental cost pa; however, we expect there is plenty of headroom on this covenant. Lease commitments Baby Bunting’s lease commitments are as follows and relate to its stores and DC/support office. Figure 33: Lease commitments SOURCES: COMPANY REPORTS Morgans forecasts – FY16-18F Our FY16 forecasts sit in line with Baby Bunting’s prospectus forecasts. Our FY17 and FY18 forecasts are detailed in the following table. The key assumption underlying our forecasts include:  Lfl sales growth – we assume 4% in FY17 and FY18;  New stores – we forecast six new stores in both FY17 and FY18 with four in metro locations and two in regional centres;  Gross margin – we assume 25bp of GM expansion in FY17 and 10bp in FY18.

This largely reflects a continued shift towards softgoods sales and higher penetration of private label/exclusive product sales; and  CODB as a % of sales – we forecast a 18bp improvement in FY17 and 20bp in FY18, which largely reflects our projected sales growth starting to leverage full investment in the support office and DC. Figure 34: Morgans’ FY17 and FY18 forecasts and assumptions SOURCES: MORGANS, COMPANY REPORTS A$m As at 28 June 2015 Within one year 12.2 Later than one year but not later than five years 33.8 Later than five years 10.4 Total 56.4 Pro forma forecast Morgans forecast Morgans forecast $ millions FY2016 FY2017 FY2018 Sales 218.6 257.1 300.9 Gross profit 76.8 EBITDA 16.3 20.3 24.7 EBIT 13.2 16.4 20.1 Profit before tax 12.9 16.2 19.9 Net profit after tax 9.1 11.4 13.9 Total stores 36 42 48 Key pro forma financial metrics Total sales growth 21.3% 17.6% 17.1% Comparable store sales growth 4.3% 4.0% 4.0% Gross profit growth 24.1% 18.6% 17.4% Gross profit margin 35.1% 35.4% 35.5% CODB as a percentage of total sales 27.6% 27.5% 27.3% EBITDA growth 32.1% 24.3% 21.7% EBITDA margin 7.5% 7.9% 8.2% EBIT growth 32.0% 24.3% 22.6% EBIT margin 6.0% 6.4% 6.7% NPAT growth 32.7% 24.9% 22.3% NPAT margin 4.1% 4.4% 4.6%

Retail│Australia│Equity research│November 22, 2015 24 Section 7: Valuation Our valuation for Baby Bunting is A$2.46. We utilise a pure DCF methodology in deriving our valuation, which we believe best reflects the long-dated nature of Baby Bunting’s earnings growth. Figure 35: DCF valuation (A$m) SOURCES: MORGANS, COMPANY REPORTS Peer comparison analysis Baby Bunting’s key comparable companies include the domestic retailers. More specifically, we believe Baby Bunting should trade relative to the following Australian peers with meaningful store rollout potential still available and those with long-dated earnings growth profiles, similar to Baby Bunting.

The top section of the following Retail Compco contains the key retailers we believe are appropriate for comparative purposes.

Figure 36: Comparative company analysis Prices as at 20 November 2015. SOURCES: MORGANS, FACTSET Total enterprise value (A$m) 299.41 Comprised of - Explicit cash flows (A$m) 117.97 - Terminal cash flows (A$m) 181.44 Less net debt (A$m) -9.12 Equity valuation (A$m) 308.52 Equity valution (per share) 2.46 WACC 10.55% Market risk premium 6.0% Risk free rate 4.3% Target gearing (D/D+E) 0.0% Equity beta 1.05 Long term growth rate 3.0% Last Mcap Name Price $M FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 Key comparable, high growth retailers Adairs Ltd. 2.49 413 9.6x 8.34x 15.7x 13.6x 14.4% 12.2% 18.7% 13.4% 18.7 10.2 3.8% 4.6% Beacon Lighting Group Ltd 1.87 401 12.3x 10.78x 20.6x 18.3x 16.6% 13.0% 15.7% 11.7% 6.9 0.7 2.7% 3.0% Burson Group Ltd 3.90 954 13.1x 10.90x 22.9x 18.6x 71.2% 14.0% 77.1% 19.7% 113.6 108.2 2.8% 3.5% Domino's Pizza Enterprises Limited 48.45 4,239 26.1x 20.47x 49.9x 38.8x 19.8% 16.9% 28.8% 26.1% 110.8 66.9 1.4% 1.8% Greencross Limited 6.35 725 9.6x 8.40x 16.3x 14.0x 15.4% 12.5% 16.7% 13.7% 236.7 219.8 2.3% 2.6% Lovisa Holdings Ltd.

3.20 336 9.7x 8.24x 16.9x 14.3x 8.7% 13.2% 13.7% 15.3% 4.2 (3.6) 4.1% 4.8% Pacific Smiles Group Ltd 2.24 340 14.7x 12.20x 30.1x 25.0x 14.9% 16.7% 20.3% 20.3% (3.5) (1.3) 2.0% 2.4% Premier Investments Limited 13.91 2,175 13.4x 12.09x 22.0x 19.9x 6.2% 7.1% 12.9% 10.6% (189.1) (205.5) 2.6% 2.8% RCG Corporation Limited 1.50 705 13.0x 11.21x 25.3x 21.0x 188.5% 15.1% 161.8% 14.5% 41.5 34.4 3.1% 3.7% AVERAGE 13.5x 11.4x 24.4x 20.4x 39.5% 13.4% 40.6% 16.1% 37.8 25.5 2.7% 3.2% AVERAGE Sales/EBITDA growth (excluding Burson & RCG given recent large acquisitions) 13.2% 17.8% AVERAGE Multiples (excluding outlier Domino's Pizza) 11.9 10.3 21.2 18.1 2.9% 3.4% Baby Bunting 16.30 13.10 30.20 24.20 21% 18% 31.5% 24.5% -4.60 -9.00 2.5% 3.2% Other, low growth domestic retailers Dick Smith Holdings Limited 0.73 173 3.2x 3.14x 4.6x 4.7x 4.7% 3.1% -7.1% 0.8% 50.8 54.1 9.5% 9.9% Fantastic Holdings Limited 2.39 247 7.4x 6.64x 15.7x 13.6x 7.3% 6.4% 17.5% 11.8% (30.6) (31.1) 3.6% 4.0% Kathmandu Holdings Limited 1.53 308 6.2x 5.46x 11.2x 9.8x 11.1% 7.1% 36.6% 10.7% 59.4 49.6 6.1% 6.7% JB Hi-Fi Limited 18.62 1,841 7.6x 7.09x 12.7x 11.9x 5.7% 6.0% 5.1% 5.9% 68.5 36.3 5.1% 5.4% Nick Scali Limited 4.18 339 9.7x 8.76x 15.9x 14.5x 18.7% 10.4% 25.5% 10.8% (2.3) (8.8) 3.1% 3.5% Orotongroup Limited 2.57 105 8.1x 7.42x 22.6x 17.6x 2.6% 6.3% 8.6% 9.0% 6.1 5.8 1.9% 2.6% Reject Shop Limited 11.22 324 6.7x 6.25x 17.7x 15.8x 5.2% 4.5% 14.5% 7.4% (14.0) (24.8) 2.5% 3.0% Super Retail Group Limited 10.28 2,027 9.2x 8.11x 16.5x 14.6x 5.8% 7.9% 13.4% 10.4% 367.7 309.1 4.3% 4.8% AVERAGE 7.3x 6.6x 14.6x 12.8x 7.6% 6.5% 14.3% 8.4% 63.2 48.8 4.5% 5.0% EV/EBITDA P/E Sales growth (%) EBITDA growth (%) Net debt ($m) Yield

Retail│Australia│Equity research│November 22, 2015 25 Section 8: Key risks Company specific risk factors  Competition: Baby Bunting operates in a competitive retail market which is subject to moderate barriers to entry and changing consumer preferences. The company’s competition includes the discount and regular department stores, online only baby product retailers, speciality baby goods retailers and international retailers. Competition is based on a variety of factors including merchandise range, price, store locations, new store rollout, store presentations, technology and customer service.

Baby Bunting’s competitive position may be adversely impacted by an existing or new competitor who attempts to aggressively grow its market share through store rollout, widespread promotion and discounting. If the company is not successful in competing in such an environment, then this may impact Baby Bunting’s competitive position resulting in loss of market share, sales and margins and have an adverse impact upon future financial performance.

 Failure to meet store rollout targets: Any delays or failure to open new stores is likely to significantly restrain the company’s ability to realise its growth initiatives. The rollout of new stores may also reduce the sales of any nearby existing stores, beyond internal company expectations.  Failure of products to comply with Australian mandatory product safety standards: Australia has strict product safety standards on the retail baby goods market and many of the products sold in Baby Bunting stores must comply with these product safety standards. From time to time, goods sold in the retail baby goods market can be subject to manufacturer or mandatory product recall notices due to failure of those goods to comply with the relevant Australian mandatory product safety standards or otherwise due to defects and risks posed by products.

Products sold by Baby Bunting (including those of its private label brand, 4Baby) may be defective and / or subject to product recalls which may require the company to immediately stop selling the affected products, remove all stock from retail outlets and recall the products from the supply chain and consumers.

 Loss or interruption to product sourcing and increase in product costs: Baby Bunting’s products are sourced and manufactured by a variety of third-party factories, primarily in China and international warehousing distributors. The co-ordination and management of this product sourcing process is primarily performed by one buying agent and a small number of other buying agents. The key risks associated with the company's product sourcing include the loss or interruption to the business of major factories, increased cost of materials, increased cost of manufacturing, delays or failure in processing orders, reduction in the quality of the manufactured products, imposition of additional taxes and duties and the failure of the buying agents to adequately perform their responsibilities.

This may in turn cause consumers to shop at Baby Bunting's competitors, adversely impact sales and margins, reduce overall profitability and adversely impact the future financial performance of Baby Bunting.

 Adverse FX movements: A small portion (c.10%) of goods that are purchased and imported by the company are purchased in USD. Consequently the risk is that Baby Bunting is exposed to fluctuations in the AUD / USD exchange rate, an increase in the AUD relative to the USD could result in decreased costs of goods imported from Asia. To the extent there are adverse movements in this exchange rate may

Retail│Australia│Equity research│November 22, 2015 26 have a material negative impact upon the company’s future financial performance.  IT systems: Baby Bunting is reliant on the capability and reliability of its IT systems, retail point of sale and inventory management systems, networks and backup systems, and those of its external service providers.

Baby Bunting is currently investing further in IT to enhance its warehouse management processes, CRM functionality, to further automate recurring administrative processes and gain improved business intelligence. If Baby Bunting’s IT systems or networks are compromised for any reason, including its retail point of sale and inventory management systems, this could adversely impact Baby Bunting's ability to trade and satisfy its obligations to its customers.  Brand damage: The Baby Bunting brand is a key aspect of the business. The reputation and value of the brand may be adversely affected by a number of factors including failure to provide customers with the quality of products and services they expect, disputes or litigation with third parties that could include suppliers, team members, customers or adverse media coverage (including social media).

Significant erosion in the reputation of, or value associated with the brand, would have an adverse effect on the company’s future performance. The reputation and value of a brand can be adversely affected by a number of factors such as loss of organic certification, contamination issues, product recall, or adverse reactions from consumers.

 Growth strategies not realising anticipated benefits: The company has a number of strategies to support future growth and earnings. There is a risk that implementation of these strategies will be subject to delays or cost overruns and there is no guarantee these strategies will generate the full benefits anticipated or result in future sales and earnings growth. Furthermore, the implementation of these growth strategies may result in changes to Baby Bunting’s business or the customer experience which may result in unintended adverse consequences if such changes affect customer preferences.

 Deterioration in the buyer/supplier relationship: Baby Bunting has a number of long standing supplier and buying agent relationships. These relationships are often governed by individual purchase orders, exclusive agreements and invoices and based upon many years of mutually beneficial trade. The key risks associated with these relationships are that the purchasing arrangements can be changed without incurring significant penalties, the supplier may cease trading, changing price levels, production difficulties or delays and the failure to ship orders in the required timeframes. If any of these risks occur and the group is unable to make acceptable alternative arrangements, Baby Bunting may incur stock shortages, a reduction in sales and a loss of market share which may impact adversely affecting its future financial performance.

 Rental costs: The company's growth prospects are based on the ability to open and operate new stores on a profitable basis. The store rollout program is dependent upon the ability to partner with landlords to secure suitable locations on acceptable terms. A significant increase in rental costs associated with new stores could impact upon margins and profitability of some stores.

Retail│Australia│Equity research│November 22, 2015 27 Section 9: Appendices Appendix 1: Company overview and background Baby Bunting is at the forefront of Australian nursery retailing, providing an unrivalled selection in all the best brands across prams, car seats, cots, nursery furniture, high chairs, bathing, feeding, home safety, toys, babywear at high levels of customer service and low prices.

Baby Bunting’s core products are within prams, cots, car seats, toys, baby wear, feeding, manchester and accessories.

Company history The Baby Bunting brand was established in 1979 by Arnold and Gail Nadelman with the first store opened in Camberwell, Melbourne, Victoria. By 2002, the introduction of large format store was opened in East Bentleigh, Melbourne followed by continued store expansion prior to a consortium of private investors purchasing a shareholding from the Nadelman family. This also included the rollout of the online business and Barry Saunders becoming Chairman. By 2015, Baby Bunting achieved a record number of store openings with a total of 8 new stores and a smaller format store established in regional locations.

Over time, Baby Bunting has organically grown its store network to become Australia’s largest speciality retailer.

Figure 37: History of Baby Bunting (by financial year) SOURCES: COMPANY REPORTS Business model basics Baby Bunting’s format stores (1,500 – 2,000 sqm) carry an extensive range of baby products (prams, furniture, cots, car seats, manchester, toys, early learning, baby wear, feeding and accessories) from newborn to 3 years of age targeted at parents to be, parents, grandparents, family and friends. Baby Bunting is purposely focused to provide customers with a wide range of products, high level of customer service and low prices. Having a sole focus on the baby goods market, broad range of products and brands is a key point of differentiation from mainstream department store, discount department store, smaller speciality retail competitors (who typically carry a narrower range of brands, do not have personalised service levels and do not necessarily provide additional services such as fittings, gift registry, online and delivery).

Baby FY1979 1 store • founded by Arnold and Gail Nadelman. The Nadelman family remain significant shareholders • the first store was in Camberwell, Melbourne FY2002 3 stores • first large format store opened in East Bentleigh FY2008 6 stores • consortium of private investors purchase a majority shareholding from the Nadelman family • Barry Saunders becomes Chairman • first store opened under new ownership in Thomastown, Melbourne • established online presence FY2009 9 stores • completed a detailed national network plan based on demographics, catchment areas and the competitive landscape • interstate expansion commences with 2 stores opened in Adelaide FY2010 12 stores • the first Sydney store was opened in Moore Park FY2011 15 stores • 3 small distribution centres consolidated into one approximately 10,000 square metre Distribution Centre in Dandenong South, Victoria FY2012 19 stores • TDM Asset Management becomes the largest shareholder in the Company with a 42% interest (fully diluted) • first Queensland and Western Australian stores opened • Matt Spencer joins as CEO and Managing Director from Kathmandu FY2013 21 stores • new Enterprise Resource Planning (ERP) system implemented and website upgraded • Baby Bunting’s largest speciality baby goods competitor, Mothercare Australia, enters voluntary administration FY2014 23 stores • starts selling Early Learning Centre (ELC) branded toy range from Mothercare UK • Distribution Centre expansion and online centralisation of order fulfilment FY2015 31 stores • Gary Levin, Tamalin Morton and Ian Cornell join the Board bringing significant additional retail experience • starts selling Mothercare branded range from Mothercare UK • record number of store openings with a total of 8 new stores • smaller format stores established in regional locations

Retail│Australia│Equity research│November 22, 2015 28 Bunting aims to provide customers a consistent retail experience across its retail network. The group’s key product ranges and sub-categories as a % of revenue are detailed below. Figure 38: Revenue by product category (FY15A) SOURCES: COMPANY REPORTS Store network and locations As at 31 August 2015, Baby Bunting operated a network of 33 stores across most Australian states and territories, except Northern Territory and Tasmania. The location and layout of stores is designed to deliver customers a consistent retail experience across the network.

The following provides an overview of Baby Bunting’s store network.

Figure 39: Baby Bunting’s store network SOURCES: COMPANY REPORTS Baby Bunting’s stores are typically located within either bulky goods centres or at standalone destination locations. Sites are chosen based on factors such as regional demographic profile, proximity to existing stores and site specific criteria. Baby Bunting targets regions where it believes the market size is Softgoods, 35% Hardgoods, 65%

Retail│Australia│Equity research│November 22, 2015 29 significant and the area is not adequately serviced by an existing Baby Bunting store. Within these regions, Baby Bunting searches for sites that satisfy its strict requirements.

Baby Bunting believes that its disciplined and strategic selection of locations and sites has been a key driver of its success. All stores are located as prominent standalone stores, high traffic homemaker centres or adjacent to complementary retailers. All of Baby Bunting’s new stores are leased with initial lease terms ranging from 5 to 10 years and typically include subsequent term extension options. The landlord base is well diversified and the company is not significantly exposed to any particular landlord. None of Baby Bunting’s lease contracts include a percentage of sales rental component and no landlord has access to the company’s sales numbers at a store level.

Store set-up Baby Bunting’s metropolitan stores typically range in size from 1,500 to 2,000 square metres with parking and parcel pick-up facilities. In regional centres, Baby Bunting typically operates a smaller store format of approximately 1,000 to 1,200 square metres, without compromising on product range or the customer service offering. Typical features of Baby Bunting’s stores include:  An accessible store format allowing easy access and navigation for parents with prams;  Access to more than 6,000 products;  A central “drive aisle” to highlight promoted items and help guide traffic into clearly demarcated product categories;  Additional services including lay-by, car seat fitting, a parenting room which includes baby weigh scales, and in-store / online gift registry, gift wrapping and;  Convenient customer parking directly outside stores with parcel pick-up facilities to allow for easy customer access.

Online presence Baby Bunting has focused on enhancing its online offering in recent years and the company’s website, www.babybunting.com.au, is Australia’s largest specialty baby goods website by number of visits. In FY15, this channel generated sales approximately equivalent to that of one of Baby Bunting’s average sized stores. Key metrics have grown strongly, with sales conversion improving by c38% and total sales increasing 59% year-on-year in FY15. This growth was assisted by the centralisation of online fulfilment in 2014, which produced a significant reduction in the average fulfilment time.

Baby Bunting’s website is integrated with the company’s marketing and promotional campaigns and helps drive traffic to stores.

A new website is currently under development designed to improve the user experience as well as adding additional features such as click and collect and live chat. Click and collect will also be functional in late FY16 (currently under development). Sales from this functionality will be attributed to the store where the products are picked up. We expect a realistic online sales contribution in the future is sub 10%, given service will remain integral to purchase given the more personal nature of baby products.

Retail│Australia│Equity research│November 22, 2015 30 Figure 40: Website sessions by month SOURCES: COMPANY REPORTS Procurement and merchandising Baby Bunting ranges over 6,000 products sourced from over 260 local and international suppliers and factories.

The group operates with a centralised team for product sourcing, ranging, supplier liaison and inventory management across its store network and the Distribution Centre. Product ranges within stores are determined by customer demographics relevant to the store catchment area as well as taking into consideration local and overseas trends.

The merchandise team determines the appropriate stock flow and stock holdings for each store by taking into consideration sales trends, upcoming promotional activity, store size as well as insights from the store team and area managers. Baby Bunting believes it has the largest and most experienced merchandise team within the Australian baby goods market. The company regularly sends members of the merchandising team to attend overseas sourcing and trade fairs to ensure it remains aware of category trends and new product innovations.

The group actively manages its range of products with a focus on procuring, stocking and distributing products that provide the customer with a wide range of choice at various price points and brands to cater for all customers’ needs.

The company procures and stocks product from a wide range of third-party brands and suppliers. In addition Baby Bunting also designs and ranges its own products under its private label brand (4Baby). The product range is manufactured to comply with Australian Standards and packaged to Baby Bunting’s private label 4Baby, which is monitored and managed through its engineering and quality control team.

Private label and exclusive products Baby Bunting also designs and ranges its own products under its private label brand (4Baby). Under the 4Baby brand, Baby Bunting currently offers products across the following departments: strollers, change tables, manchester, apparel, plastics (baths, potties, etc.), toys, consumables and highchairs. Currently, Baby Bunting is not focused on product categories such as car seats that have very onerous and costly compliance testing requirements. Baby Bunting regularly sells products on an exclusive basis for third-party brands, for example Early Learning Centre (ELC) for Mothercare UK.

Baby Bunting believes its private label and exclusive product offering helps provide product differentiation relative to its competitors. - 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15

Retail│Australia│Equity research│November 22, 2015 31 Together, private label and exclusively distributed products contributed to approximately 7.2% of revenue in FY15 and Baby Bunting expects this to increase to over 10% in the medium term. Figure 41: Private label and exclusive products as a % of sales SOURCES: MORGANS, COMPANY REPORTS Suppliers Baby Bunting sources products from a large number of suppliers, including third-party distributors and brand owners. Baby Bunting’s supplier base is fragmented, with more than 260 suppliers in the company’s network. The top 10 suppliers represented approximately 47% of sales in FY15.

The group has focused on working with its key suppliers to leverage its increasing scale to buy in bulk container loads, delivering price and transport-related efficiencies. Working closely with suppliers has also enabled Baby Bunting to secure access to exclusive brands and products. In addition, suppliers frequently utilise Baby Bunting’s store network to showcase and launch new products.

Figure 42: Supplier breakdown by revenue (FY15) SOURCES: COMPANY REPORTS The majority of exclusive products are designed and sourced internationally with third-party factories and co-ordinated with specialist teams in those locations. A small proportion of stock is also supplied through local wholesalers in Australia. 0% 2% 4% 6% 8% 10% 12% FY12A FY13A FY14A FY15A Medium term target Remaining suppliers 53% Top 10 suppliers 47%

Retail│Australia│Equity research│November 22, 2015 32 Sales and marketing Baby Bunting aims to offer every day low pricing and value for its customers.

This is further reinforced by a national pricing structure and a price guarantee to match the lowest price offered by competitors in store or online. Baby Bunting promotional activity is carried out in an integrated manner across various channels. The business utilises traditional channels (regional TV, radio, print and catalogue), online (email, search and digital), as well as social media with the goal of promoting value, exclusivity and newness as well as building the brand nationally.

Baby Bunting has weekly email specials and seven catalogue sale events pa. Around 4.3m catalogues are distributed each sale event while 255,000 emails are sent regarding current promotions each week. Baby Bunting also actively participates in baby expos across Australia. These events are used to promote certain brands and channel customers into Baby Bunting stores. In 2016, Baby Bunting is focused on developing a single view of the customer through the use of CRM software. The CRM software will help to segment Baby Bunting’s customers to maximise relevance and engagement with customers through their baby’s early years of development.

A recent brand health survey conducted by the company indicated that Baby Bunting’s most successful marketing tool is word of mouth. This is a critical and instrumental factor in allowing the company to limit its marketing expenditure to less than 2% of sales and establishing strong brand awareness. Figure 43: Typical promotion (online marketing of catalogue) SOURCES: COMPANY REPORTS Loyalty programs Baby Bunting operates a loyalty program called the VIP Club, which is available to all retail customers. Members receive 5% off fully priced products. Management is currently remodelling the loyalty program, which will be an extension of the new CRM system.

The aim will be to better segment and target customers (eg targeted marketing around children’s birthdays).

Retail│Australia│Equity research│November 22, 2015 33 Logistics and supply chain Baby Bunting operates its Distribution Centre of approximately 10,000 square metres in Dandenong South, Victoria. 1,600 products are held in the DC for store and online fulfilment and 2,200 held for online fulfilment only. 25% of products are fulfilled from the DC and make up over 50% of sales. This provides Baby Bunting greater control over the supply chain for key products and helps to minimise disruption at stores from supplier deliveries. Management expects to continue to increase the number of products held in the DC and gain greater control over the supply chain and further improve the flow of inventory and stock availability, both in-store and online.

Management believes that its current distribution capacity will be sufficient to support the company’s planned growth for the foreseeable future. Figure 44: % of products through DC vs direct to store Figure 45: % of revenue through DC vs direct to store SOURCES: COMPANY REPORTS SOURCES: COMPANY REPORTS DC to store 25% Supplier to store 75% DC to store 53% Supplier to store 47%

Retail│Australia│Equity research│November 22, 2015 34 Appendix 2: Board and management Board of Directors  Matt Spencer (CEO and Managing Director): Matt joined Baby Bunting as CEO and Managing Director in February 2012. Prior to Baby Bunting, Matt was General Manager Retail - Australia, New Zealand and the UK at Kathmandu from 2007 to 2012 where he was responsible for over 110 stores, including network planning, store design and store development. Matt’s previous roles include as Operations, Strategy and Development Manager of Coles Express and was a key contributor to the establishment and roll-out of the Coles Express brand, as well as various management roles at Shell Australia.

 Barry Saunders (Non-Executive Chairman): Barry has over 50 years of retailing experience in Australia across a variety of categories. He was previously CEO of The Reject Shop from 2000 to 2007, a period of strong growth for the company that included its listing on the ASX in 2004. Barry’s past roles have included CEO of Target Australia, Managing Director of Myer, and Chief General Manager of Big W. Barry has served on the boards of The Myer Emporium, Coles Myer, Woolworths and The Reject Shop.  Gary Levin (Non-Executive Director): Gary has over 30 years management, executive and non-executive experience in public and private companies including in the retail, investment and property industries.

He is currently a non-executive director of JB Hi-Fi Limited having joined the Board in 2000 when the company had only 15 stores. Gary has been actively involved through the strong growth phase of JB Hi-Fi during which sales grew from $155 million in FY2001 to $3.5 billion in FY2014. Gary was previously the founder and Managing Director of TLC Dry Cleaners Pty Limited and joint Managing Director of Rabbit Photo Holdings Limited.  Tom Cowan (Non-Executive Director): Tom is a partner at TDM Asset Management, a Sydney based private investment firm. TDM Asset Management invests in public and private companies globally.

Tom has over 15 years of financial markets experience, including roles in corporate finance and investment banking at Investec Wentworth and KPMG Australia. Tom is currently non-executive Chairman of CSG Limited.  Tamalin Morton (Non-Executive Director): Tamalin has considerable international retail experience, having worked in the UK with leisure retailer Bass plc, in Australia with Coles Group, and in Australia, New Zealand and the UK with Kathmandu. She is currently General Manager – Marketing and Brand at Medibank Private, a position she has held since December 2014. Prior to joining Medibank, Tamalin spent 7 years at Kathmandu including as Group General Manager – Sales and Marketing.

 Ian Cornell (Non-Executive Director): Ian has extensive experience in the retailing and property industries in Australia. He most recently held senior executive corporate roles with the Westfield Group until 2012, including responsibility for all HR functions and the overall management of retail relations for the Group. Prior to joining Westfield, Ian held a 23-year career with Woolworths. His roles included Chief General Manager of Woolworths Supermarket division and as a key member of the management team that implemented successful growth strategies such as “The fresh food people” and the establishment of the Dan Murphy’s chain.

Ian has also been Chairman and CEO of Franklins. Ian is currently a non- executive director of Myer and William Inglis, and was a non-executive director of Goodman Fielder until it was taken over in March 2015.

Retail│Australia│Equity research│November 22, 2015 35 Management  Matt Spencer (CEO and Managing Director): See above.  Darin Hoekman (CFO and Company Secretary): Darin joined Baby Bunting as CFO in January 2014. Prior to Baby Bunting Darin spent over 5 years with Godfreys as Group Financial Controller and Acting CFO, and as a member of the Senior Executive Team. His previous experience includes as Finance Manager of Chemnet Australia, a division of Orica with turnover of approximately $350 million (2005 to 2008). Darin previously held a 6- year career with Ernst & Young focusing on the retail and manufacturing sectors.

 Scott Teal (General Manager Merchandise and Marketing): Scott joined Baby Bunting as General Manager Merchandise and Marketing in May 2013. Prior to Baby Bunting, Scott was General Manager of General Merchandise Buying at Harris Scarfe from 2008-2012, as well as a member of the Harris Scarfe Board from 2009-2012. Scott’s previous roles have included 17 years at Coles Group where he held a number of merchandise buying and buying manager roles within various departments.  Michael Pane (General Manager Operations): Michael joined Baby Bunting in December 2005. Michael has more than 25 years of retailing experience in the baby goods market having joined Pram City (later renamed BabyCo) in 1988.

During his career with BabyCo Michael gained broad retail experience though a number of leadership roles including as Operations Manager, National Buyer, and Warehouse and Logistics Manager. At the time, BabyCo was the largest specialty retailer in the baby goods market with approximately 30 stores nationally.  Caine Groves (General Manager Logistics): Caine joined Baby Bunting in July 2012. Caine has over 10 years of experience in senior supply chain and logistics roles, most recently as National Business Manager at CEVA Logistics from 2009 to 2012. His previous roles include as National New Business Implementation Manager at Post Logistics and National Logistics Manager at King Island Dairies covering many areas of the supply chain.

 Catherine Power (IT Manager): Catherine joined Baby Bunting in March 2015. Catherine has over 15 years of experience in IT and systems management, specialising in business and IT strategies, project management, business analysis and solution architecture. Prior to joining Baby Bunting, Catherine spent 5 years at Toll Holdings including as Manager of Business Analysis and Customer Deployment and most recently as Business Solution Architect for the Strategy and Architecture Team. Catherine has also held positions in IT and systems management at Fusion Retail Brands, Godfreys, and Mitre10.

 Sandy Nikakis (HR Manager): Sandy joined Baby Bunting as Human Resources Manager in June 2014. Sandy has over 15 years of experience in human resources management roles including at Pharmore Pharmacies, AWPL, and The Perfume Connection. Sandy brings a broad human resources background with a specialised focus on training and development, talent management and culture.

Retail│Australia│Equity research│November 22, 2015 36 Appendix 3: Competitor analysis Figure 46: Baby Bunting - key competitors (multi-channel) SOURCES: MORGANS, COMPANY REPORTS Baby Kingdom • Family owned business since 1995.

• 3 huge super stores, only in the Sydney region. • Specialising in baby products including nursery furniture, Manchester, prams, car seats, high chairs and many more items. • Price match, package deals Bubs Baby Shops • Guy William Hinze as trustee for the Bubs Franchise Unit Trust. • Established by husband and wife team, Guy and Meagan Hinze in March 2000 as “Noosa Bubs” with $24k in a 160sqm shed in the Noosaville Industrial Estate.

• Now re-named “Bubs Baby Shops” have 7 stores, an e-commerce website, distribution centre and nearly 100 staff. • Bubs Baby stores are located throughout Queensland, in Brisbane, the Gold Coast and the Sunshine Coast and also on the Central Coast of New South Wales at Tuggerah and Rutherford. • Most stores are approx. 1200sqm in size and located in homemaker centres in QLD and NSW. • May do price match on the Bubs Baby Shops online store. Babies "R" Us • Toys“R”Us, Inc. operated as a public company from 1978 until July 2005. At that time, an investment group consisting of affiliates of Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co.

(KKR) and Vornado Realty Trust completed an acquisition of Toys“R”Us, Inc. for $6.6 billion.

• Toys “R” Us Inc. first launched Babies “R” Us in 1996 in Westbury, New York. Babies “R” us is now the leading baby product specialty retailer in the US with more than 230 locations across the country. • The first Australian Toys”R”Us store opened in September 1993, followed by Babies “R” Us. There are currently 13 Babies”R”Us Superstores in Australia, located in Moore Park, Bankstown, Campbelltown, Castle Hill, Erina, Highpoint, Doncaster, Gepps Cross, Majura Park, Cannington and Innaloo.

• There are also another 19 stores across Australia incorporated with the Toys “R” Us stores that have a smaller range of baby products.

• Able to leverage off our US supplier base, can have much better speed to market. • Age range: On the toy side, offer the transition right through to toddlers and teenagers. Parenthood • Established in 2006 – private company • Three stores located in Melbourne VIC – Richmond, Malvern and Nunawading. • Range includes bedroom furniture, linen, toys, prams, cots, nursery furniture, baby care, clothes and more. Baby Co • Babyco first started trading in November 1970 under the trading name of Golden J Nursery. • The chain, which had 22 stores across Victoria, New South Wales, Queensland and South Australia, was put in the hands of Deloitte partners Tim Norman, Sal Algeri and Simon Cathro after almost 40 years in business to be placed in voluntary administration in August 2009.

• A former BabyCo supplier, Edwin Haryanto, through investment company Australian Yarn, purchased the collapsed retail chain for an undisclosed amount. Says he bought the business due to his familiarity with the brand. • The acquisition fell through at the 11th hour when the terms of the contract of sale could not be met. Deloitte was forced to sell the assets of the company, including the brand name, separately. • A small private company The Baby Project General Partner Pty Ltd (as general partner of The Baby Project Limited Partnership) decided to purchase the brand name and revamp it. There is no affiliation to the past owners.

• The store now has 3 retail store outlets in Melbourne VIC. • There are now car seats, cots, strollers, highchairs, prams, walkers, rockers, change tables and other nursery furniture. • Baby and children's clothing ranging from prem up to age four. • Toy range is also much larger and so is the Manchester. My Baby Warehouse • Private company owned • Age range: baby to toddler products • Has ecommerce website as well as 21 retail outlets: 12 in NSW, 5 in QLD, 1 in ACT, 3 in WA • ‘Price Beat’ guarantee applies to any cheaper final price on a stocked item of an Australian based outlet in your state.

My Baby Warehouse will match the price, and beat it by $10 or 1% - whichever is higher.

Belly 2 Baby •Owned by: The trustee for Titan Trust – Discretionary Trading Trust • Age range: Baby to toddler • 2 stores have now been closed • Does not offer price match – although offers 3% discount when you spend over $500 (per year) through VIP membership Baby Savings • 3 Stores located in NSW • Does not do price match • Offers brand new, carton damaged, factory second and end of range products – so could be competitive on pricing for this reason Big W • Owned by listed company Woolworths • In 2014, there were 182 Big W stores trading across Australia: 63 in New South Wales, 42 in Queensland, 36 in Victoria, 17 in Western Australia, 15 in South Australia, five in the Australian Capital Territory, three in Tasmania and one trading in the Northern Territory.

• Lowest price guarantee - constantly checking prices against competitors (including Kmart and Target) to ensure competitive pricing • Also offers price match • Offers products for all ages – from baby, kids, teens and adults Kmart • Owned by listed company Wesfarmers • Kmart is one of Australia’s largest retailers, with 192 stores throughout Australia and New Zealand • Offers products for all ages – from baby, kids, teens and adults • Kmart offers guarantee to match the advertised price on any identical stocked item. Target • Owned by publicly listed company Wesfarmers • Target operates 183 Target stores and 125 Target Country stores across Australia making 308 combined stores • In 1996, Target introduced Baby Target as a standalone store format specifically for baby products.

The concept had limited success. • Offers products for all ages – from baby, kids, teens and adults

Retail│Australia│Equity research│November 22, 2015 37 Figure 47: Online only SOURCES: COMPANY REPORTS UrbanBaby • Established in 2002 by two mums Linda Hattersley & Christine J Thompson in Partnership – still owned and run by partners • Online only store - based in Sydney NSW, e-store only, however you are able to pick up orders from the distribution centre in Sydney • Product sent next day from order – can return if not happy with product • Offer price match - if you find the same product for less and we will do our best to match or even better that price. • Rated 3.6 out of 5 (7 votes) Babycare Nursery • Babycare Nursery is a family owned and operated business.

It was established in 1986. Family Partnership - J Duong & S Khuu • Also owns ‘Baby’s choice’ - www.babyschoice.com.au • Mostly e-commerce, 1 store location in Sydney NSW • Rated 4.9 out of 5 on productreview.com (177 reviews)

Retail│Australia│Equity research│November 22, 2015 38 Appendix 4: Comparable company data Figure 48: Peer group lfl sales growth (%) Figure 49: Peer group EBITDA margin (%) SOURCES: MORGANS, COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS Figure 50: Peer group Gross Profit Margin (%) SOURCES: MORGANS, COMPANY REPORTS Title: Source: Please fill in the values above to have them entered in your re -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% ADH BLX BAP GXL PMV DMP LOV Baby Bunting FY13 FY14 FY15 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% ADH BLX BAP GXL PMV DMP LOV Baby Bunting FY13 FY14 FY15 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% ADH BLX BAP GXL PMV LOV Baby Bunting FY13 FY14 FY15

Retail│Australia│Equity research│November 22, 2015 39 Queensland New South Wales Victoria Western Australia Brisbane +61 7 3334 4888 Sydney +61 2 9043 7900 Melbourne +61 3 9947 4111 West Perth +61 8 6160 8700 Stockbroking, Corporate Advice, Wealth Management Stockbroking, Corporate Advice, Wealth Management Stockbroking, Corporate Advice, Wealth Management Stockbroking, Corporate Advice, Wealth Management Brisbane: Edward St +61 7 3121 5677 Armidale +61 2 6770 3300 Brighton +61 3 9519 3555 Perth +61 8 6462 1999 Brisbane: Tynan Partners +61 7 3152 0600 Ballina +61 2 6686 4144 Camberwell +61 3 9813 2945 South Australia Bundaberg +61 7 4153 1050 Balmain +61 2 8755 3333 Carlton +61 3 9066 3200 Adelaide +61 8 8464 5000 Cairns +61 7 4222 0555 Bowral +61 2 4851 5515 Farrer House +61 3 8644 5488 Norwood +61 8 8461 2800 Caloundra +61 7 5491 5422 Chatswood +61 2 8116 1700 Geelong +61 3 5222 5128 Emerald +61 7 4988 2777 Coffs Harbour +61 2 6651 5700 Richmond +61 3 9916 4000 Gladstone +61 7 4972 8000 Gosford +61 2 4325 0884 South Yarra +61 3 8762 1400 Gold Coast +61 7 5581 5777 Hurstville +61 2 9570 5755 Southbank +61 3 9037 9444 Ipswich/Springfield +61 7 3202 3995 Merimbula +61 2 6495 2869 Traralgon +61 3 5176 6055 Kedron +61 7 3350 9000 Neutral Bay +61 2 8969 7500 Warrnambool +61 3 5559 1500 Mackay +61 7 4957 3033 Newcastle +61 2 4926 4044 Milton +61 7 3114 8600 Newport +61 2 9998 4200 Australian Capital Territory Mt Gravatt +61 7 3245 5466 Orange +61 2 6361 9166 Canberra +61 2 6232 4999 Noosa +61 7 5449 9511 Port Macquarie +61 2 6583 1735 Redcliffe +61 7 3897 3999 Scone +61 2 6544 3144 Northern Territory Rockhampton +61 7 4922 5855 Sydney: Level 7 Currency House +61 2 8216 5111 Darwin +61 8 8981 9555 Spring Hill +61 7 3833 9333 Sydney: Level 9 +61 2 8215 5000 Tasmania Sunshine Coast +61 7 5479 2757 Sydney: Hunter St +61 2 9125 1788 Hobart +61 3 6236 9000 Toowoomba +61 7 4639 1277 +61 2 9615 4500 Townsville +61 7 4725 5787 Sydney: Reynolds Equities +61 2 9373 4452 Yeppoon +61 7 4939 3021 Wollongong +61 2 4227 3022 Disclaimer The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances.

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Regulatory disclosures Morgans was a Co-Manager to the IPO of Baby Bunting and received fees in this regard. An analyst owns shares in this company. Recommendation structure For a full explanation of the recommendation structure, refer to our website at http://www.morgans.com.au/research_disclaimer Research team For analyst qualifications and experience, refer to our website at http://www.morgans.com.au/research-and-markets/our-research-team Stocks under coverage For a full list of stocks under coverage, refer to our website at http://www.morgans.com.au/research-and-markets/company-analysis/ASX100-Comp anies-under-coverage and http://www.morgans.com.au/research-and-markets/company-analysis/EX-100-Comp anies-under-coverage Stock selection process For an overview on the stock selection process, refer to our website at http://www.morgans.com.au/research-and-markets/company-analysis www.morgans.com.au If you no longer wish to receive Morgans publications please contact your local Morgans branch or write to GPO Box 202 Brisbane QLD 4001 and include your account details.

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