Bubs Australia (ASX:BUB), a maker of goat milk infant formula, organic infant food and toddler snacks, has demonstrated remarkable revenue growth on the back of a resilient US consumer, according to a US market update released last week.
It has been a timely result, sending the share price up over 40 per cent since the start of March. Prior to the announcement, the share price had been lagging for years, trading at a 90 per cent discount to 2019 and 2020 highs. COVID supply chain disruptions and breakdowns with the company's Chinese daigou distributor contributed to underperformance.
Bubs' revamped board has addressed issues weighing on the share price and has sought to unlock shareholder value with a new global approach. In less than 12 months into its ambitious growth strategy, management has achieved quarter on quarter growth of 8.3 per cent, with US sales for the quarter accounting for more than 50 per cent of revenue.
In contrast, Bubs has shown poor performance in China since signing a corporate daigou partnership in 2022, highlighting the potential capital losses when management does not quite execute. Chinese consumers are willing to pay a premium for high-quality Australian goods, and the rising middle class of China will continue to be a thematic in the future, but the challenge for Australian companies is how to meet that demand. The recent turnaround of competitor A2 Milk (ASX:A2M) demonstrates overseas demand for quality Australian infant products remains.
A change of focus towards the US offers Bubs a higher degree of operational safety and access to a local consumer that has been undeterred by the Fed's credit tightening. In the current climate, Bubs is well positioned to see a return in demand and sales growth, as the company offers a wide range of premium infant and toddler products, a segment of the market that is counter inflationary and should also benefit from the luxury goods outperformance of recent years. The broader non-discretionary consumer goods sector has significantly outperformed the market over the past two years as consumers are forced to absorb higher prices and investors look for an inflation hedge, namely the supermarket giants. Bubs has the capacity to fit within this investment trend.
Unfortunately, sizable losses from the company's China-based operations and subsequent capital raises occurred during a significant deterioration of macroeconomic conditions and a period of capital flight to companies with profitability and proven performance. The losses and cash injection required to execute Bubs' US market expansion destroyed investor confidence.
The fact that Bubs' financial missteps occurred at the height of economic panic in 2023 suggests that there may have been an overreaction from the market. At the start of March 2024, the company was trading at nearly 10 cents to the dollar from the share price in June 2020. The recent rally has shown the market interest in Bubs growing US-based revenues and moving away from risks associated with sales in China.
Bubs are operating within a non-discretionary consumer sector that has positive tailwinds as the inflation narrative continues. The company also has long-run growth prospects within the world's largest economy, as it proceeds along the pathway for FDA permanent access. The successful market pivot and discounted share price make Bubs a stock to watch in 2024.
