The Baby Bunting Group Ltd (ASX: BBN) share price is having a day to forget on Tuesday.
In morning trade, the baby products retailer's shares have crashed 25% to a two-year low of $2.92.
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Why is the Baby Bunting share price crashing?
Investors have been selling down the Baby Bunting share price following the release of a trading update at the company's annual general meeting.
According to the release, as of 7 October, Baby Bunting's sales were up 12% year to date. This has been driven by total transaction growth of 15.2%, comparable store sales growth of 7.6%, and online sales growth of 19.6%.
However, things aren't quite as positive for its earnings due to significant margin pressure.
What's happening to its margins?
The release reveals that Baby Bunting's first quarter gross profit margin was below expectations and down 230 basis points over the prior corresponding period to 37.2%.
This has led to first quarter net profit after tax falling $3 million year over year despite its double-digit top line growth.
Baby Bunting's CEO, Matt Spencer, explained that this has been driven by the company's decision to compete with rivals on pricing despite rising inflation. He commented:
In Q1 FY23, we expected a minor year-on-year reduction in gross margin as a result of the Loyalty program only commencing in November 2021 plus more products moving to Every Day Low Price. The amount of the actual reduction has been greater than anticipated.
In tougher economic times, we continue to emphasise value in a competitive environment. We have maintained entry price points across our range ensuring great value every day, every visit. During the quarter, we have seen some competitors discounting top selling items to drive sales. Our 5% Price Promise is a key part of our response to this and it means we will not be beaten on price.
In addition, unrecovered cost increases, soft demand for playgear, and loyalty program redemptions have been weighing on its margins.
Outlook
Positively, the company's inventory levels are well-controlled and it has plans in place to address the first half impacts to recover earnings over the full year.
However, given "the continuing economic uncertainty, inflationary pressures and other global challenges", Baby Bunting isn't providing further guidance about FY 2023 earnings at this point.
