For the year ended: 52 weeks ended 26 June 2016 Previous corresponding period: 52 weeks ended 28 June 2015 RESULTS FOR ANNOUNCEMENT TO THE MARKET Statutory Financial Results Revenue from ordinary activities Net profit from ordinary activities after tax attributable to members Net profit attributable to members 2016 $’000 2015 $’000 236,840 180,175 8,334 8,334 6,040 6,040 Earnings before interest, tax, depreciation and amortisation 15,743 11,982 Mvmt $’000 56,665 2,294 2,294 3,761 Pro Forma Financial Results Revenue from ordinary activities 236,840 180,175 56,665 Net profit from ordinary activities after tax attributable to members Net profit attributable to members 10,627 10,627 6,823 6,823 Earnings before interest, tax, depreciation and amortisation 18,673 12,360 3,804 3,804 6,313 up/(down) % 31.4% 38.0% 38.0% 31.4% 31.4% 55.8% 55.8% 51.1% Pro forma financial results have been calculated to reflect the result of the consolidated entity for the year ended 26 June 2016 and the comparative period as if the Company was publicly listed for the full year. The following table reconciles the statutory to pro forma financial results for the year ended 26 June 2016 (noting that this financial information has not been audited in accordance with Australian Auditing Standards): Year ended 26 June 2016 $’000 Statutory results Adjusted for non-recurring Initial Public Offering (IPO) related items: IPO transaction costs Historical share options plan1 Employee gift offer2 Tax impact from IPO related items Underlying statutory results Other pro forma adjustments: Listed public company costs3 Net finance costs Tax impact from other pro forma adjustments Sales EBITDA 236,840 15,743 EBIT 12,564 NPAT 8,334 – – – – 1,876 1,876 1,876 786 416 – 786 416 – 786 416 (688) 236,840 18,821 15,642 10,724 – – – (148) (148) – – – – (148) 65 (14) Pro forma results 236,840 18,673 15,494 10,627 1. Expense reflects the cost amortisation of the historical share options plan which was accelerated when the IPO of shares in the Company became probable and the Directors and senior executives committed to exercising their share options. Indirect tax costs of $0.311 million associated with the historical share options plan have been recognised in the current reporting period. 2. The Company issued a total of 283,458 shares (714 shares per eligible employee) in “the Employee Gift Offer” in the IPO with no monetary consideration payable by participating eligible employees. Indirect tax costs of $0.019 million associated with the offer have been recognised in the current reporting period. 3. The Listed public company costs adjustment is made to actual costs incurred to better reflect a full year of costs in a listed environment (noting Baby Bunting was admitted to quotation on the ASX on 14 October 2015). i APPENDIX 4E(Rule 4.3A)APPENDIX 4E 2016BABY BUNTING GROUP LIMITEDABN 58 128 533 693 The following table reconciles the statutory to pro forma financial results for the year ended 28 June 2015 (noting that this financial information has not been audited in accordance with Australian Auditing Standards): Year ended 28 June 2015 $’000 Statutory results Adjusted for non-recurring Initial Public Offering (IPO) related items: Historical share options plan Tax impact from IPO related items Underlying statutory results Other pro forma adjustments: Listed public company costs Net finance costs Tax impact from other pro forma adjustments Sales EBITDA 180,175 11,982 – – 877 – EBIT 9,610 877 – NPAT 6,040 877 – 180,175 12,859 10,487 6,917 – – – (499) (499) – – – – (499) 343 62 Pro forma results 180,175 12,360 9,988 6,823 DIVIDENDS Dividends paid Amount per security (cps) Franked amount Pre IPO special dividend – paid 14 October 2015 15.0 100% Dividends determined Final 2016 dividend Record date for determining entitlements to the dividend Date dividend is payable The Company does not currently offer a dividend reinvestment plan. COMMENTARY ON RESULTS FOR THE PERIOD 6.3 100% 26 August 2016 16 September 2016 For further explanation of the statutory figures above refer to the accompanying financial report for the year ended 26 June 2016, which includes the Directors’ Report. The Full Year Results Presentation released in conjunction with this Results Announcement provides further analysis of the results. Pro forma financial results have been prepared on a consistent basis with the pro forma financial information in the Company’s Prospectus dated 29 September 2015. Adjustments from statutory to pro forma financial results have been made to exclude the impact of IPO transaction costs expensed, and estimate the impact on the financial results for the year and previous corresponding period as if the Company had undertaken an IPO and become a listed company at the beginning of each financial period. ii APPENDIX 4E(Rule 4.3A)BABY BUNTING GROUP LIMITED NET TANGIBLE ASSETS PER ORDINARY SHARE Net tangible asset per ordinary share DETAILS OF ENTITIES OVER WHICH CONTROL HAS BEEN GAINED Name of the entity Baby Bunting EST Pty Ltd OTHER INFORMATION INDEPENDENT AUDIT BY AUDITOR 2016 $ 0.35 2015 $ 0.26 Date of the gain of control 10 September 2015 This report is based on the consolidated financial statements which have been audited by Deloitte Touche Tohmatsu. iii APPENDIX 4E(Rule 4.3A)APPENDIX 4E 2016 This page has been left intentionally blank. iv BABY BUNTING GROUP LIMITED BABY BUNTING GROUP LIMITED ABN 58 128 533 693 ANNUAL FINANCIAL REPORT 26 JUNE 2016 CONTENTS Directors’ Report Remuneration Report Auditor’s Independence Declaration Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report 1 12 19 20 51 52 BABY BUNTING GROUP LIMITED • Pro forma* earnings before interest, tax, depreciation, and amortisation (EBITDA) up 51.1% on the prior year to $18.7 million; • Pro forma* earnings before interest and tax (EBIT) up 55.1% on the prior year to $15.5 million; • Pro forma* NPAT of $10.6 million, up 55.8% on the prior year; and • Pro forma* costs of doing business (CODB) were $62.5 million or 26.4% of sales, an improvement of 109 basis points on the prior year (CODB of 27.5% of sales in FY2015). * Pro forma financial results exclude the impact of IPO transaction costs expense, and estimate the impact on the financial results for the year and previous corresponding period as if the Company had undertaken an IPO and become a listed company at the beginning of each financial period. Refer to Section 2.6 for a reconciliation between statutory and pro forma financial results. The above overview of the FY2016 financial results is discussed in detail below. 2.2 THE COMPANY’S BUSINESS MODEL The Company’s business model centres around the sale of third party produced and branded baby goods through its store network and website. The Company also sells private label and exclusive products. Private label products are products sold by the Company under its own brand (the Company currently markets its private label products under the 4Baby brand name). Exclusive products are products sourced by the Company for sale on an exclusive basis (so that those products can only be purchased in Australia from Baby Bunting stores). Historically, exclusive supply arrangements have been arranged with suppliers in relation to selected products and for varying lengths of time. The Directors of Baby Bunting Group Limited (“the Company” or “Baby Bunting”) submit the financial report of the Company and its controlled entities (“the consolidated entity”) for the financial year ended 26 June 2016. 1. PRINCIPAL ACTIVITIES During the financial period, the principal activities of the Company and its consolidated entities was the operation of Baby Bunting retail stores and its online store www.babybunting.com.au. Baby Bunting is Australia’s largest specialty retailer of baby goods, primarily catering to parents with children from newborn to three years of age and parents-to-be. The Company’s principal product categories include prams, cots and nursery furniture, car safety, toys, babywear, feeding, nappies, manchester and associated accessories. 2. OPERATING AND FINANCIAL REVIEW 2.1 SUMMARY – FY2016 FINANCIAL RESULTS • Total sales up 31.4% to $236.8 million with comparable store sales growth of 12.5%; • Gross profit of $81.2 million up 31.2%. Gross profit as a percentage of sales consistent with prior year at 34.3%; • Statutory net profit after tax (NPAT) of $8.3 million, an increase of 38.0% on the prior financial year; • Statutory basic earnings per share (EPS) of 7.0 cents, and Pro Forma basic EPS of 8.9 cents; • Net cash of $7.4 million (versus net debt of $4.4 million at the end of FY2015); and • Final dividend of 6.3 cents per share for FY2016. During the 2016 financial year, the Company undertook an initial public offering (IPO). It was admitted to the official list of the Australian Securities Exchange (ASX) on 14 October 2015. The statutory results are impacted by the effect of one- off transaction costs associated with the IPO and the costs to include the additional costs to conduct the business as an ASX- listed company from 14 October 2015 onwards. These significant events and changes during the reporting period make comparisons to the previous year more difficult. Therefore, discussion on the results also includes pro forma results for 2016 and the comparative period. 1 DIRECTORS’ REPORTANNUAL FINANCIAL REPORT 2016 Baby Bunting’s business model leverages several core competitive advantages, as summarised in the table below. Drivers of competitive advantage Comment Scale platform Convenient network of stores and a leading website Baby Bunting is the largest specialty retailer in the Australian baby goods market. Its industry position and continued growth has enabled the Company to invest in its people, technology, brand, inventory levels, prices and customer experience. The Company currently operates 36 stores across Australia. The Company’s website, www.babybunting.com.au, is Australia’s leading specialty baby goods website as measured by number of visits. The Company is focused on delivering customers a consistent and excellent shopping experience across all channels, providing flexibility on how, when and where they transact. Customer centric team culture Baby Bunting has a dedicated team of well trained and knowledgeable staff to service customers’ individual needs. Consistent retail format Baby Bunting is focused on providing customers with a consistent retail experience across its network. The Company’s major market stores range in size from approximately 1,500 to 2,000 square metres and are typically located in either bulky goods centres or at stand-alone sites. In regional centres, the Company typically operates a smaller store format of approximately 1,000 to 1,200 square metres, without compromising product range or customer service. Store formats and layout are largely consistent across the network, with customer-friendly navigation and clear demarcation of categories. Convenient parking is available directly outside all stores with parcel pick-up facilities allowing for easy loading of bulky items into customers’ vehicles. Widest product offering, in-stock and available Baby Bunting offers what it believes to be the widest range of products, with over 6,000 products available. Through its store network and approximately 10,000 square metre Distribution Centre, Baby Bunting aims to have its product range in-stock and available at the time of the customer’s purchase. Competitively priced Baby Bunting’s scale enables it to maintain low prices and deliver value to customers with a national pricing policy backed by a price match guarantee. In particular, Baby Bunting’s range of private label products (sold under the brand 4Baby) are sold at entry level prices across a number of categories. Comprehensive range of ancillary services Across its entire store network, Baby Bunting provides additional services to its customers, including lay-by, car seat fitting, parenting rooms which include baby weigh scales, and an in-store/online gift registry. During FY2016, the Company introduced a click & collect service. Cost effective marketing The Company considers that its most successful marketing tool is word of mouth. This is a critical factor in allowing the Company to limit its marketing expenditure to approximately 2% of sales. Baby Bunting’s marketing is further supported by traditional channels (regional TV, print media, catalogue and radio), online (email, search and digital) as well as social media. Baby Bunting also participates actively in baby expos. 2.3 STORE NETWORK The Company currently operates a network of 36 stores across all 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 Company will open its thirty-seventh store at Preston, Victoria in August 2016. Preston is the first of between four and eight stores the Company plans to open in FY2017. 2.4 PEOPLE The Company currently employs approximately 778 staff throughout Australia with approximately 700 employed at the Company’s stores, 20 in logistics (including at the Distribution Centre at Dandenong South) and 58 at the Company’s Support Office at Dandenong South. 2 DIRECTORS’ REPORTBABY BUNTING GROUP LIMITED 2.5 REVIEW OF THE COMPANY’S OPERATIONS Non-IFRS measures During the financial year, the Company continued to implement its strategy of growth from existing stores and its online store as well as growing its network of stores. Key operational achievements for the Company in FY2016 included: • opening five new stores, being Booval, North Lakes, Burleigh Waters and Capalaba in Queensland and Campbelltown in New South Wales; • • implementing a new warehouse management system; launching a new website for the online store; • enabling “click & collect” services for customers to purchase items online for collection at one of the Company’s stores in a location convenient for the customer; The consolidated entity uses certain measures to manage and report on its business that are not recognised under Australian Accounting Standards. These measures are collectively referred to as “non-IFRS financial measures”. Non-IFRS measures are intended to supplement the measures calculated in accordance with Australian Accounting Standards and are not a substitute for those measures. Underlying statutory and pro forma results and measures are intended to provide shareholders additional information to enhance their understanding of the performance of the consolidated entity. Non-IFRS financial measures that are referred to in this report are as follows: Non-IFRS financial measure Definition • expanding the range of private label and exclusive products; EBITDA • implementing a new online learning and development platform that will support the development of the growing team and help the Company continue to deliver high levels of service to its customers; and • migrating IT infrastructure to an external data centre and upgrading communications infrastructure. EBIT 2.6 REVIEW OF THE COMPANY’S FINANCIAL Operating EBIT PERFORMANCE Summary The Board was pleased that the Company exceeded the sales, EBITDA and NPAT forecasts included in the prospectus released in September 2015 for the Company’s IPO. Key highlights from the results include: • sales of $236.8 million, up 31.4% on the prior year, and 8.3% above the prospectus forecast; • pro forma EBITDA of $18.7 million, up 51.1% on the prior year and 14.4% above the prospectus forecast; • pro forma EBIT up 55.1% on the prior year to $15.5 million; • pro forma NPAT of $10.6 million, up 55.8% on the prior year, and 17.3% above the prospectus forecast; • pro forma CODB as a percentage of sales improved 109 basis points to 26.4% in FY2016. Pro forma CODB increased 26.2% on the prior year; and • gross profit increased 31.2% on the prior year. Gross profit margin was consistent year on year, at 34.3% of sales. Earnings before interest, tax, depreciation and amortisation expenses. Eliminates non-cash charges for depreciation and amortisation. Earnings before interest and tax. EBIT eliminates the impact of the consolidated entity’s capital structure and historical tax position when assessing profitability. Excludes the effects of interest revenue, finance costs, income tax, change in fair value of interest rate swap and other non- operating costs. The CEO and Managing Director assesses the performance of the only operating segment (Australia) based on a measure of Operating EBIT. Pro forma financial results Pro forma financial results have been calculated to reflect the result of the consolidated entity for the year ended 26 June 2016 and the comparative period as if the Company was publicly listed for the full year. The following table reconciles the statutory to pro forma financial results for the year ended 26 June 2016 (noting that this financial information has not been audited in accordance with Australian Auditing Standards): 3 ANNUAL FINANCIAL REPORT 2016 Year ended 26 June 2016 $’000 Statutory results Adjusted for non-recurring Initial Public Offering (IPO) related items: IPO transaction costs Historical share options plan1 Employee gift offer2 Tax impact from IPO related items Underlying statutory results Other pro forma adjustments: Listed public company costs3 Net finance costs Tax impact from other pro forma adjustments Sales EBITDA 236,840 15,743 EBIT 12,564 NPAT 8,334 – – – – 1,876 1,876 1,876 786 416 – 786 416 – 786 416 (688) 236,840 18,821 15,642 10,724 – – – (148) (148) – – – – (148) 65 (14) Pro forma results 236,840 18,673 15,494 10,627 1. Expense reflects the cost amortisation of the historical share options plan which was accelerated when the IPO of shares in the Company became probable and the Directors and senior executives committed to exercising their share options. Indirect tax costs of $0.311 million associated with the historical share options plan have been recognised in the current reporting period. 2. The Company issued a total of 283,458 shares (714 shares per eligible employee) in “the Employee Gift Offer” in the IPO with no monetary consideration payable by participating eligible employees. Indirect tax costs of $0.019 million associated with the offer have been recognised in the current reporting period. 3. The Listed public company costs adjustment is made to actual costs incurred to better reflect a full year of costs in a listed environment (noting Baby Bunting was admitted to quotation on the ASX on 14 October 2015). The following table reconciles the statutory to pro forma financial results for the year ended 28 June 2015 (noting that this financial information has not been audited in accordance with Australian Auditing Standards): Year ended 28 June 2015 $’000 Statutory results Adjusted for non-recurring Initial Public Offer (IPO) related items: Historical share options plan Tax impact from IPO related items Underlying statutory results Other pro forma adjustments: Listed public company costs Net finance costs Tax impact from other pro forma adjustments Pro forma results Revenue Sales EBITDA 180,175 11,982 – – 877 – EBIT 9,610 877 – NPAT 6,040 877 – 180,175 12,859 10,487 6,917 – – – (499) (499) – – – – (499) 343 62 180,175 12,360 9,988 6,823 The FY2016 sales of $236.8 million represented an increase of 31.4% on FY2015. This sales growth was achieved through: • 12.5% comparable store sales growth which was achieved through higher than expected sales growth in both the Company’s store network and in its online store; • the annualising benefit of eight stores opened in FY2015, trading for a full financial year in FY2016; and • growth from the opening of five new stores during FY2016. Baby Bunting stocks in excess of 6,000 individual stock keeping units (SKU’s). In FY2016, the Company saw particularly strong sales growth from the core categories including prams, car safety, feeding, consumables, as well as nappies. 4 DIRECTORS’ REPORTBABY BUNTING GROUP LIMITED Sales from private label and exclusive products grew approximately 80% on the prior year, and were 10.0% of total sales in FY2016, up from 7.2% in FY2015. 3. BUSINESS STRATEGIES AND FUTURE DEVELOPMENT Expenses Pro forma CODB expenses as a percentage of sales improved 109 basis points to be 26.4% of sales (versus 27.5% of sales in FY2015). In FY2016, pro forma CODB expenses were $62.5 million, up 26.2% on the prior year pro forma CODB expenses of $49.5 million. The increase in business expenses was driven by: • eight stores opened in FY2015 trading for a full financial year in FY2016; • five new stores opened in FY2016; and • the continued investment in the Support Office team, business processes and business systems to support the expanding store network and to improve the customer experience both in stores and online. Ensuring the business is appropriately sized for future growth continues to be a priority. 2.7 REVIEW OF THE COMPANY’S FINANCIAL POSITION The Company finished the financial year in a net cash position of $7.4 million, relative to a net debt position of $4.4 million at the end of FY2015. The $11.8 million improvement in the Company’s net cash/debt position was achieved through: • $21.4 million of net cash funds generated through the issue of new equity, as part of the IPO in October 2015; • $3.7 million of cash proceeds received from the exercise of historical share options prior to the IPO; and • $9.0 million of cash generated from operations (excluding IPO costs), less the following significant cash outflows: • payment of $16.1 million in the pre–IPO dividend in October 2015; and • capital expenditure of $6.2 million in FY2016. Maintaining appropriate inventory levels to fulfil customer needs continues to be a key focus of the business. In FY2016, inventory increased from $35.5 million in the prior year to $41.0 million at the end of FY2016. The increase was driven by a combination of five new stores opened in FY2016 (each new store requires an inventory investment of approximately $0.8 million), and the need for further investment in inventory to support the significant increase in sales volumes experienced by the existing store network. Inventory turn-over for FY2016 was 4.1 times per annum, an improvement on the prior year of 3.6 inventory turns. Trade and other payables increased from $19.6 million in FY2015 to $23.8 million in FY2016, which has increased in line with increased inventory holdings and the expanded store network relative to the prior year. Dividends The Board has determined to pay a final dividend of 6.3 cents per share. This is equivalent to approximately 75% of the Company’s FY2016 pro forma NPAT. The dividend payment date is 16 September 2016. The Company’s current strategy is focussed on growing its existing business and continuing to improve its execution and financial performance. This strategy has the following key elements: Growth from existing stores and online The Company’s store network includes a significant proportion of “immature” stores, with 45% of stores less than three years old as at 26 June 2016. The Company’s stores historically take an average of 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. Online sales are included in the calculation of comparable store sales growth. During FY2016, online sales continued to grow strongly and now make up approximately 4.2% of sales (including both online sales and “click & collect” sales), up from 3.5% of sales in FY2015. Reflecting on global trends in online shopping and the general growth in digital sales, the Company has launched a new responsive website and introduced “click & collect” service to ensure customers are provided with convenient ways to shop and the best possible customer experience. 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, with the aim of replicating the strong first-to-mind awareness of the Company’s brand in Victoria and South Australia across other parts of Australia; • improving customer experience. In this regard, management are focussed on investments in customer programs, in-store technology and remodelling of the loyalty program. Investments in inventory and logistics also remain a priority in order to continue to improve stock availability; and • performing targeted and effective marketing campaigns. The Company continues to explore ways to use its customer analytics to drive highly targeted digital marketing. In addition, the Company has commenced the process to identify customer relationship management (CRM) systems to provide improved service for, and better engagement with, customers. New store roll-out The Company is looking to grow the network of stores to over 80 stores and the Company plans to open four to eight new stores per year. The Company expects to open between four and eight stores in FY2017. The Company will continue to focus on new store openings only where its rigorous selection criteria are met. The Company evaluates potential new store locations on the following criteria: • local market size; • proximity to existing stores (cannibalisation is assessed using postcode analysis of sales at existing stores); • demographic profile; • site type (assessed by convenience, visibility, parking availability, parcel pick-up and other factors); 5 ANNUAL FINANCIAL REPORT 2016 • store size and layout (the Company targets a store size of approximately 1,500 to 2,000 square metres, or 1,000 to 1,200 square metres in regional areas); • available lease term; and • required upfront capital expenditure. including merchandise range, price, advertising, store location, store presentation, product presentation, new store roll-out and customer service. Ultimately, the Company seeks to address competitive risks by focussing on providing customers with the widest range of products, high levels of service and low prices every day. EBITDA margin improvement Over recent years, the Company has invested significantly in its capabilities to improve gross profit margin. Whilst the Company enjoyed improved gross profit margins in its key categories in FY2016, due to above average sales growth in lower gross profit margin earning products, overall gross profit was consistent with the prior year at 34.3% of sales. The Company’s strategy is to continue the following initiatives: • support for the Company’s merchandise team to enable reshaped supplier relationships, focusing on developing better strategies in range and product mix and expanding private label and exclusive product sales; • growing private label and exclusive product offerings. The Company offers private label products in strollers, change tables, manchester, babywear, portacots, plastics, toys, consumables and highchair categories. While gross profit margin on private label and exclusive products varies by product, the Company believes that increased sales in these categories will facilitate further margin improvement in future periods; and • continuing to achieve efficiencies in logistics. This will involve pursuing the benefits of the Company’s investments in its Distribution Centre as well as working with third party logistics providers, suppliers and distributors to achieve price, transport and related supply chain efficiencies. Another element of the Company’s strategy for EBITDA margin improvement is the continued leverage of the investment that the Company has made in its Support Office and Distribution Centre. Further information on likely developments in the Company’s operations and the expected results of those operations has not been included in this Directors’ Report. The Directors believe that the disclosure of such information, including certain business strategies, projects, and prospects would be likely to result in unreasonable prejudice to the Company’s interests. 4. KEY RISKS AND UNCERTAINTIES The Company’s strategies take into account the expected operating and retail market conditions, together with general economic conditions, which are inherently uncertain. The Company has structured risk management and internal control systems in place to manage material risks. The key risks and uncertainties that may have an effect on the Company’s ability to execute its business strategies and the Company’s future growth prospects and how the Company manages these risks are set out below. 4.1 COMPETITIVE RISKS The Company faces competition from specialty retailers as well as department stores, discount department stores and online only retailers. Competition is based on a variety of factors 4.2 STRATEGIC AND BUSINESS PLAN RISKS A failure to achieve the Company’s strategies relating to growth from existing stores and online, new store roll-out and EBITDA margin improvement, could impact the Company’s financial performance and position. By way of example, the Company’s ability to successfully open stores as planned may be affected by a number of factors, including the ability to find and acquire rights to suitable locations, negotiations with landlords and the ability to find and retain suitable employees. 4.3 EXTERNAL ECONOMIC RISKS Although the purchase of baby goods may be considered less discretionary compared with other consumer goods categories, Baby Bunting’s performance is sensitive to the current state of, and future changes in, the retail environment and general economic conditions in Australia. A deterioration in the retail environment may cause consumers to reduce their level of consumption of discretionary items. Less than 10% of goods sourced by the Company are purchased directly in a foreign currency. However, the Company’s Australian- based suppliers have exposure to foreign currency, most notably the USD, providing the Company with a secondary foreign currency exposure. The Company has historically elected to pass on changes to the cost of goods from foreign exchange movements without adversely impacting sales or gross profit margin. Where the Company does make direct purchases in a foreign currency, the Company may for large exposures enter into arrangements to conservatively manage the risk associated with adverse foreign currency movements. 4.4 OPERATIONAL RISKS As described above, an element of the Company’s strategy involves growing its private label and exclusive product offerings. The ability of the Company to continue to offer exclusive products depends upon the relationships it has with suppliers. Any deterioration of those relationships could adversely impact the Company’s ability to supply exclusive products or, more generally, to successfully provide customers with a wide range of products at competitive prices. The Company continues to invest in its merchandising team to continue to ensure that it is appropriately managing relationships with its suppliers. The Company’s supply chain is important to ensuring that products are available in-store and online for customers. The key risks associated with Baby Bunting’s supply chain include operational disruption due to catastrophic events such as fire or flood, delays in product delivery or complete failure to receive products ordered. Poor supply chain management could adversely affect the Company’s financial performance and customers’ experience of shopping with Baby Bunting. The Company continues to focus on logistics initiatives to ensure that this risk is managed appropriately. 6 DIRECTORS’ REPORTBABY BUNTING GROUP LIMITED 4.5 TECHNOLOGY RISKS 6. MATTERS SUBSEQUENT TO THE END OF The Company relies on its IT systems, retail point of sale and inventory management systems, networks and backup systems, and those of its external service providers, such as communication carriers and data providers, to process transactions (including online transactions), manage inventory, report financial results and manage its business. A malfunction of IT systems or a cyber- security violation could adversely impact Baby Bunting’s ability to trade and to satisfy the needs of its customers. The Company has a continuing focus on IT systems and security (including migration of IT infrastructure to an external data centre), with the aim of ensuring that the IT systems are available to support the Company’s operations and that steps are being taken to protect against adverse IT related events. 4.6 PEOPLE MANAGEMENT RISKS Workplace health and safety is a priority at Baby Bunting. Failure to manage health and safety risks could have a negative effect on the Company’s reputation and performance. The Company has a Safety Management System, which includes a Health, Safety and Injury Management Policy, with the aim of identifying and assessing workplace health and safety risks as well as educating employees in stores, at the Support Office and at the Distribution Centre about safe ways of working. The Company’s future performance depends to a significant degree on its key personnel, and its ability to attract and retain experienced and high performing personnel. The Company’s remuneration policies and practices seek to ensure that executives and managers are provided with appropriate incentives and rewards to support their retention. In addition, the Company is continuing to make investments in training and development to further expand the skills of the Company’s employees. 4.7 REGULATORY RISKS Many of the products sold in Baby Bunting’s stores or online must comply with Australian mandatory product safety standards. In addition, products Baby Bunting sells must comply with general product safety requirements under Australian law and also meet the expectations of our consumers. Failure to do so may adversely affect the Company’s reputation and performance and result in significant financial penalties. The Company has procedures to assess compliance issues of the products that it supplies, as well as procedures to respond to and investigate reports of product safety incidents that it receives. 5. SIGNFICANT CHANGES IN THE STATE OF AFFAIRS IN FY16 The Company was admitted to the official list of the Australian Securities Exchange (ASX) on 14 October 2015. A diversified group of retail and institutional shareholders acquired shares in Baby Bunting Group Limited at the listing. Transaction costs of $1.876 million (pre-tax) attributable to the listing were recognised in the Consolidated Statement of Profit or Loss and Other Comprehensive Income in the current reporting period. Transaction costs of $1.754 million were recognised directly in equity ($1.228 million, net of tax) which represent the portion of transaction costs attributable to the issuance of new shares. THE FINANCIAL YEAR No matter or circumstance has arisen since the end of the financial year which has not been dealt with in this Directors’ Report or the Financial Report, and which has significantly affected, or may significantly affect: • the Company’s operations in future financial years; • the results of those operations in future financial years; or • the Company’s state of affairs in future financial years. 7. DIVIDENDS The following dividends have been paid to shareholders during the financial year: Pre-IPO dividend (special dividend) Special dividend of 15 cents per share (fully franked) paid to each shareholder of the Company at 29 September 2015 and paid on 14 October 2015 $’000 16,117 The Board has determined to pay a final dividend in respect of the financial year ended 26 June 2016 of 6.3 cents per share. This dividend is franked to 100% at the 30% corporate income tax rate. The record date for this final dividend is 26 August 2016 and the dividend payment date is 16 September 2016. The final dividend for the financial year of 6.3 cents per share represents a payout ratio of approximately 75% of the full year pro forma NPAT. 8. DIRECTORS The following persons were directors of the Company during the financial period and/or up to the date of this Directors’ Report: Director Position Date appointed Barry Saunders Chairman 7 December 2007 Matt Spencer CEO and Managing Director 23 April 2012* Ian Cornell Non-executive Director 1 January 2015 Tom Cowan Non-executive Director 19 June 2009 Gary Levin Non-executive Director 25 August 2014 Melanie Wilson Non-executive Director 15 February 2016 * Matt Spencer joined the Company in February 2012 as CEO. He was appointed a Director on 23 April 2012. During the financial year, Tamalin Morton was also a Non-executive Director of the Company (retired 12 February 2016). In addition, during the financial year (and prior to the Company’s ASX listing), Arnold Nadelman was a non-executive director (retired 24 July 2015), Grant Nadelman (retired 24 July 2015) was an alternate director for Arnold Nadelman and Hamish Corlett (retired 11 August 2015) was an alternate director for Tom Cowan. 7 ANNUAL FINANCIAL REPORT 2016 Details of the qualifications, experience and special responsibilities of each current director are as follows: Name Particulars Barry Saunders Chairman Non-executive Director B.Comm Member of the Remuneration and Nomination Committee Matt Spencer CEO and Managing Director B.Bus Ian Cornell Non-executive Director Fellow of the Australian Institute of Management, Fellow of the Australian Human Resources Institute Member of the Audit and Risk Committee Member of the Remuneration and Nomination Committee Tom Cowan Non-executive Director B.Comm (Hons) Chairman of the Remuneration and Nomination Committee Member of the Audit and Risk Committee Gary Levin Non-executive Director B.Comm, LLB Chairman of the Audit and Risk Committee Barry has over 50 years of retailing experience in Australia across a variety of categories. He was previously the CEO of The Reject Shop from 2000 to 2007, a period of strong growth for the company that included its listing on 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 previously served on the boards of The Myer Emporium, Coles Myer, Woolworths and The Reject Shop. Matt joined Baby Bunting as CEO and Managing Director in February 2012 (he was appointed as a Director of the Company on 23 April 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 Operations, Strategy and Development Manager of Coles Express as well as various management roles at Shell Australia. He was a key contributor to the establishment and roll-out of the Coles Express brand. 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 of the Group. Prior to joining Westfield, Ian had 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 Holdings Limited (appointed in February 2014). Ian was a non-executive director of Goodman Fielder Limited (appointed February 2014 and ceasing in March 2015). 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 a non-executive director of CSG Limited (appointed in February 2012). Gary has over 30 years’ management, executive and non-executive experience in public and private companies including in the retail, investment and property industries. Gary was previously the founder and managing director of TLC Dry Cleaners Pty Limited and joint managing director of Rabbit Photos Holdings Limited. He is currently a non-executive director of JB Hi-Fi Limited, having joined the board of that company in November 2000. Melanie Wilson Non-executive Director MBA, B.Comm (Hons), GAICD Melanie has more than 12 years’ international retail experience in senior management roles. Her appointments included Limited Brands (Victoria’s Secret, Bath & Bodyworks – New York), Starwood Hotels (New York), Woolworths and Diva/Lovisa and have covered a wide spectrum of retail including store operations, merchandise systems, online-e-commerce, marketing, brand development and logistics/ fulfilment. In her most recent position, Melanie was Head of Online at BIG W. Prior to her retail experience, Melanie performed roles at Bain and Company (Boston) and Goldman Sachs (Hong Kong and Sydney). Melanie has an MBA from the Harvard Business School and is a graduate of the Australian Institute of Company Directors. She is currently a non-executive director of iSelect Limited (appointed in April 2016) and Shaver Shop Group Limited (appointed in June 2016). 8 DIRECTORS’ REPORTBABY BUNTING GROUP LIMITED 9. MEETINGS OF DIRECTORS AND BOARD COMMITTEES The number of meetings of the Board and each Board Committee held during the period ended 26 June 2016 are set out below. All directors are invited to attend Board Committee meetings. Most Board Committee meetings are attended by all directors. However, only attendance by directors who are members of the relevant Board Committee is shown in the table below. Director Meetings of directors Audit and Risk Committee Remuneration and Nomination Committee Barry Saunders Matt Spencer Ian Cornell Tom Cowan Gary Levin Melanie Wilson Tamalin Morton* A 14 14 14 14 14 4 6 B 14 14 14 14 14 4 9 A – – 2 2 2 – – B – – 2 2 2 – – A 2 – 2 2 – – – B 2 – 2 2 – – – Notes: A = Number of meetings attended. B = Number of meetings held during the time the director held office or was a member of the Committee during the year. * = Tamalin Morton retired on 12 February 2016. During the financial year, while he remained a director, Arnold Nadelman attended one meeting of directors. Neither Grant Nadelman nor Hamish Corlett (in their capacities as alternate directors) attended any meetings of directors. 10. DIRECTORS’ RELEVANT INTERESTS IN SHARES The following table sets out the relevant interests that each director has in the Company’s ordinary shares or other securities as at the date of this Directors’ Report. Director Barry Saunders Matt Spencer Ian Cornell Tom Cowan Gary Levin Melanie Wilson Ordinary shares Performance rights 3,227,291 nil 2,487,132 1,881,714 610,000 36,901,303* 488,000 nil nil nil nil nil * Tom Cowan is a partner of TDM Asset Management. It holds shares directly and has an indirect interest in the shares held by its clients by virtue of the control it exercises in relation to the shares under its investment management arrangements with its clients. 9 ANNUAL FINANCIAL REPORT 2016 11. COMPANY SECRETARIES 14. REMUNERATION REPORT Corey Lewis is the Group Legal Counsel and Company Secretary. He commenced employment with the Company in February 2016 and was appointed company secretary in March 2016. Before joining Baby Bunting, Corey worked for over 15 years as a corporate lawyer at the law firm Ashurst. He holds a Bachelor of Laws (Honours) and a Bachelor of Arts. He is also a Graduate of the Australian Institute of Company Directors. Darin Hoekman, the Company’s Chief Financial Officer, is also a company secretary having been appointed in January 2014. Darin is a Chartered Accountant and holds a Bachelor of Commerce. 12. DETAILS OF PERFORMANCE RIGHTS During the financial year, the Company granted 5,331,524 performance rights under the Company’s long term incentive plan (LTI Plan). The CEO and Managing Director was the only Director eligible to participate in the LTI Plan. Further details of the LTI Plan are set out on pages 14 and 15 of the Remuneration Report. Upon vesting, each right entitles the participant to one fully paid ordinary share in the Company. No performance rights have been granted since the end of the financial year. All of the performance rights granted during the financial year are subject to the same performance conditions (see pages 14 and 15 of the Remuneration Report for more details). Date performance rights granted 14 October 2015 (grant under the LTI Plan) 10 June 2016 (grant under the LTI Plan) Closing balance Issue price nil nil Number of performance rights 5,017,905 313,619 5,331,524 Each performance right entitles the holder to receive one fully paid share in the Company, subject to the satisfaction of the applicable performance conditions. The Board will determine whether the relevant performance conditions have been satisfied. Any performance rights that have not vested at the end of the third performance period (which occurs following the release of the Company’s financial results for the 2020 financial year), will lapse. The Remuneration Report, which forms part of this Directors’ Report, is presented separately from page 12. 15. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS Under the Company’s Constitution, to the fullest extent permitted by law, the Company must indemnify every officer of the Company and its wholly-owned subsidiaries, and may indemnify its auditor against any liability incurred as such an officer or auditor to a person (other than the Company or a related body corporate). The Company has entered into a deed of access, indemnity and insurance with each Non-executive Director and the CEO and Managing Director which confirms each person’s right of access to certain books and records of the Company while they are a Director and after they cease to be a Director. The deed also requires the Company to provide an indemnity for liability incurred as an officer of the Company and its subsidiaries, to the maximum extent permitted by law. The Constitution also allows the Company to enter into and pay premiums on contracts of insurance, insuring any liability incurred by a current or former Director and officer of the Company. The deed of access, indemnity and insurance requires the Company to use its best endeavours to maintain an insurance policy, which insures the Director against liability as a Director and officer of the Company from the date of the deed until the date which is seven years after the Director ceases to hold office as a Director. During the financial year, the Company paid insurance premiums for a directors’ and officers’ liability insurance contract that provides cover for the current and former directors, secretaries, executive officers and officers of the Company and its subsidiaries. The Directors have not included details of the nature of the liabilities covered in this contract or the amount of the premium paid, as disclosure is prohibited under the terms of the contract. 16. PROCEEDINGS ON BEHALF OF THE COMPANY No proceedings have been brought or intervened in on behalf of the Company with the leave of the court under section 237 of the Corporations Act. No person has applied to the court under section 237 of the Corporations Act for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party. 13. DETAILS OF OPTIONS There are no options over shares on issue as at the date of this Directors’ Report. Details of shares issued during the year as a result of options exercised are set out in the Financial Statements (at Note 19c). 17. ENVIRONMENTAL REGULATION The Company is not involved in activities that have a marked influence on the environment within its area of operation. As such, the Directors do not consider that the Company’s operations are subject to any particular and significant environmental regulation in Australia. 10 DIRECTORS’ REPORTBABY BUNTING GROUP LIMITED 18. NON-AUDIT SERVICES The Company may decide to employ its external auditor on assignments additional to its statutory audit duties where the auditor’s expertise and experience with the Company are important. Details of the amounts paid or payable to the auditor (Deloitte Touche Tohmatsu) for audit and assurance ($314,500) and non-audit ($32,920) services provided during the year are set out in the Financial Statements (at Note 27). The Board has considered the position and, in accordance with advice received from the Audit and Risk Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence imposed on auditors imposed by the Corporations Act. The directors are satisfied that the provision of non-audit services by the auditor did not compromise the auditor independence requirements of the Corporations Act for the following reasons: • all non-audit services have been reviewed by the Audit and Risk Committee to ensure that they do not impact on the impartiality and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. 19. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is attached to this Directors’ Report on page 19. 20. ROUNDING OF AMOUNTS The Company has taken advantage of ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 relating to the “rounding off” of amounts in the Directors’ Report and Financial Statements. Amounts in these reports have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. The Directors’ Report is made in accordance with a resolution of Directors. On behalf of the Directors Barry A E Saunders Chairman Melbourne: 12 August 2016 11 ANNUAL FINANCIAL REPORT 2016 Dear Shareholders On behalf of your Board, I am pleased to present Baby Bunting’s first Remuneration Report. The Board recognises that the performance of Baby Bunting depends on the quality and motivation of its people. The Company’s remuneration strategy seeks to appropriately reward, incentivise and retain key employees. This Report is intended to provide you with an understanding of a number of elements of the Company’s remuneration strategy. It discloses the remuneration of the Non-executive Directors and certain other executives (referred to as “disclosed executives”). In addition, it also describes key elements of the remuneration practices for the other executives and Team Members who all play a key role in contributing to the Company’s performance and success. In connection with the Company’s ASX listing, the Company established two new equity incentive schemes, being the General Employee Share Plan (GES Plan) and the Long Term Incentive Plan (LTI Plan). The GES Plan was established to reward Baby Bunting employees as part of the Company’s overall remuneration policy. Under the first offer made under this plan, eligible employees each received 714 shares for no monetary consideration in conjunction with the Company’s IPO. The Board intends making grants under the GES Plan in the future to eligible employees to reward sustainable financial performance. The second equity incentive scheme is the LTI Plan, which is designed to align the interests of executives and senior managers more closely with the interests of the Company’s shareholders. It does this by providing an opportunity for eligible employees to receive an equity interest in the Company through the grant of performance rights to receive shares in the Company. Grants made under the LTI Plan during the financial year are subject to performance conditions that are assessed over periods of between three and five years and are described further in this Remuneration Report. Initial grants under the LTI Plan were made in FY2016. The Board believes that providing incentives is a very important and meaningful way of improving business performance, for rewarding success and for recognising an individual’s performance and their contribution to the Company’s overall success. Accordingly, eligible employees (in addition to executives) may be provided with an opportunity to receive an annual short term incentive payment based on the individual’s and the Company’s performance. Recognising the responsibility of the disclosed executives and other executives for the Company’s operating and financial performance, their remuneration has been structured to provide (relative to comparable organisations), for a lower level of base salary combined with a higher proportion of “at-risk” remuneration. The “at-risk” remuneration consists of short term incentives and performance rights granted under the LTI Plan (described further in the Remuneration Report). The Board is confident that the Company’s remuneration policies and practices are well designed having regard to the interests of our Team Members and the Company as a whole. Tom Cowan Chairman of the Remuneration and Nomination Committee 12 REMUNERATION REPORTBABY BUNTING GROUP LIMITED The Remuneration Report sets out remuneration information for the Company’s Non-executive Directors and other key management personnel (disclosed executives) for the year ended 26 June 2016. The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001. 3. REMUNERATION POLICY AND PRACTICES The Company’s remuneration policy seeks to appropriately reward, incentivise and retain key employees. The remuneration practices adopted by the Company include the use of fixed and variable remuneration, and short term and long term performance based indicators. 1. KEY MANAGEMENT PERSONNEL The Company’s key management personnel are its Non-executive Directors and those executives who have been identified as having the greatest authority for planning, directing and controlling the activities of the Group. Non-executive Directors Barry Saunders Non-executive Chairman Ian Cornell Tom Cowan Gary Levin Melanie Wilson Non-executive Director Non-executive Director Non-executive Director Non-executive Director (appointed 15 February 2016) Former Non-executive Directors Tamalin Morton Arnold Nadelman Grant Nadelman Hamish Corlett Retired 12 February 2016 – Non-executive Director Retired 24 July 2015 – Non-executive Director Retired 24 July 2015 – Alternate director for Arnold Nadelman Retired 11 August 2015 – Alternate director for Tom Cowan Disclosed executives Matt Spencer CEO and Managing Director Darin Hoekman Chief Financial Officer 2. REMUNERATION GOVERNANCE Ultimately, the Board is responsible for the Company’s remuneration policy and practices. To assist the Board with this, it has established the Remuneration and Nomination Committee (Committee). The Committee’s role is to review and make recommendations to the Board on remuneration policies and practices and to ensure that the remuneration policies and practices are consistent with the strategic goal of the Board of increasing shareholder wealth over the long term. A copy of the Committee’s Charter is available on the Company’s website at www.babybuntingcorporate.com.au. It sets out further details of the Committee’s specific responsibilities and functions. Details of the composition of the Committee and the meetings held during the year are set out on page 9 of the Directors’ Report. 3.1 FIXED REMUNERATION Fixed remuneration for employees is determined according to industry standards, relevant laws, labour market conditions and the profitability of the Company. It consists of base remuneration and superannuation. Base remuneration includes cash salary and any salary sacrifice items. The Company provides employer superannuation contributions at Government legislated rates, capped at the relevant concessional contribution limit unless part of a salary sacrifice election by an employee. Fixed remuneration is reviewed annually and adjusted where appropriate. There is no guaranteed or automatic entitlement to an increase in fixed remuneration (other than to comply with any applicable legal requirements). 3.2 SHORT TERM INCENTIVES The Company operates short term incentive plans for eligible employees, including executives and employees in other management or specialist roles. Under the Company’s short term incentive plans (STI plans), a cash bonus can be paid to an eligible employee, subject to the achievement of a range of financial and non-financial key performance indicators for the relevant financial year. Participation in, and payments under, the STI plans for a financial year are at the discretion of the Board. The annual key performance indicators for participants and related targets are also reviewed annually. For participants to become eligible to receive a payment under the STI plans, the Company must achieve certain EBIT growth targets for the financial year (with the result inclusive of payments under the STI plans). The amount of the payment (if any) received by a participant depends upon the employee satisfactorily achieving previously agreed key performance criteria and the employee’s overall performance for the year meeting the required standard. For the executives participating in the STI plan in the 2016 financial year (including the disclosed executives) the size of the potential STI payment is determined having regard to achieving year on year pro forma EBIT growth. Accordingly: • • • if “threshold” year on year pro forma EBIT growth is not achieved, no STI payment is to be made. This reflects the principles that no significant benefit is to be provided where the Company’s financial results do not justify providing any payment and also that there must be a relationship between performance and reward; if “threshold” year on year pro forma EBIT growth is achieved, the potential STI payment is 20% of the participating executive’s base remuneration; and if year on year pro forma EBIT growth exceeds “threshold” growth, the size of the potential STI payment increases proportionally. To encourage and reward participants for extraordinary performance, there is no maximum potential STI payment. 13 ANNUAL FINANCIAL REPORT 2016 3.3 LONG TERM INCENTIVE PLAN Introduction The LTI Plan is designed to align the interests of executives and senior employees more closely with the interests of the Company’s shareholders by providing an opportunity for eligible employees to receive an equity interest in the Company through the grant of “performance rights”. Upon vesting, each performance right entitles the participant to one fully paid ordinary share in the Company. Participation in the LTI Plan is by invitation. The Board may determine which executives or other senior employees are eligible. In FY2016, rights have been granted to the CEO and Managing Director, the Chief Financial Officer and other executives. In the first three years of its operation, the number of rights to be granted will be limited to a maximum of 5% of the number of the Company’s shares on issue upon completion of the IPO. Performance conditions and performance periods The number of rights that vest will be determined by reference to two performance conditions. Half of the rights granted are subject to an earnings per share (EPS) growth performance condition (EPS Rights). The other half of the rights granted are subject to a total shareholder return (TSR) growth condition (TSR Rights). Broadly, TSR is a measure of the increase in the Company’s share price (assuming dividends are reinvested). Both of these conditions are expressed as a compound annual growth rate (CAGR) percentage. The EPS growth performance condition is a measure of the compound annual growth rate in the Company’s EPS measured over the relevant performance period. EPS growth will be measured as the annual compound percentage increase in the Company’s EPS with the base level EPS calculated by dividing the Company’s NPAT for the financial year ended 26 June 2016 (excluding the expense of the LTI Plan recognised in the Company’s statutory financial statements and any unusual items) by the number of Shares on issue as at 26 June 2016. The TSR growth performance condition is a measure of the compound annual growth of the Company’s TSR measured over the relevant performance period with $1.40 (being the price at which shares were issued in the Company’s IPO) used as the base level (and with no allowance for the “pre-IPO dividend” paid by the Company at the time of the IPO). For the 2016 financial year, pro forma EBIT growth relative to the 2015 financial year was 55.1%. This resulted in a potential STI payment for participating executives equal to 35% of their base remuneration. The size of each participating executive’s actual STI payment was determined by applying financial and non-financial criteria. For the disclosed executives, the weighting of the performance criteria was: Disclosed executive Financial criteria weighting Non-financial criteria weighting Matt Spencer Darin Hoekman 70% 70% 30% 30% Achievement of year on year pro forma EBIT growth of 55.1% (and after allowing for the payments to be made under the STI plans) meant that the financial criteria was satisfied in its entirety. The non-financial criteria for the disclosed executives (collectively) consisted of: • succcesful completion of the Company’s IPO; • property related initiatives; • development of internal reporting and business processes; • successful implementation of IT initiatives and projects; and • employee engagement initiatives. These performance criteria were selected to provide an incentive to participating executives to achieve specific targets relevant to the business as well as contributing to the overall financial performance of the Company. There is a large weighting to the Company’s financial result (70%), reflecting the principle that benefits under the STI Plan are to be provided primarily when the Company has performed well. Assessment of whether the performance criteria have been satisfied for participating executives is undertaken by the CEO and Managing Director with any decision to award a payment approved by the Board. In relation to the CEO and Managing Director, the Board assesses the relevant performance criteria and approves any STI payment. For the disclosed executives, the extent to which the financial criteria and non-financial criteria were achieved and the resulting STI award for the 2016 financial year was: Disclosed executive % of financial criteria achieved % of non- financial criteria achieved % of maximum STI awarded % of STI forfeited Matt Spencer Darin Hoekman 100% 100% 73% 90% 92% 97% 8% 3% STI plan benefits are paid in cash and reflect amounts earned during the financial year and are provided for in the annual financial statements. Any STI plan payments are payable in September. 14 REMUNERATION REPORTBABY BUNTING GROUP LIMITED The performance periods and the number of rights that vest if the relevant performance condition is satisfied are as follows: EPS Rights TSR Rights Performance periods There are three separate performance periods that apply to the EPS Rights: There are three separate performance periods that apply to the TSR Rights: • 20% of the EPS Rights will be assessed against EPS growth measured in the two year period from the end of FY2016 to the end of FY2018; • 30% of the EPS Rights will be assessed against EPS growth measured in the three year period from the end of FY2016 to the end of FY2019; and • 50% of the EPS Rights will be assessed against EPS growth measured in the four year period from the end of FY2016 to the end of FY2020. If an EPS Right does not vest at the end of the first and/or second performance period, it does not lapse but remains available for vesting at the end of the next applicable performance period. If an EPS Right has not vested at the end of the third performance period, it will lapse. There is no further re-testing after the third performance period. • 20% of the TSR Rights will be assessed against TSR growth measured in the period from the Company’s listing on ASX to shortly following the release of the Company’s financial results for FY2018; • 30% of the TSR Rights will be assessed against TSR growth measured in the period from the Company’s listing on ASX to shortly following the release of the Company’s financial results for FY2019; and • 50% of the TSR Rights will be assessed against TSR growth measured in the period from the Company’s listing on ASX to shortly following the release of the Company’s financial results for FY2020. If a TSR Right does not vest at the end of the first and/or second performance period, it does not lapse but remains available for vesting at the end of the next applicable performance period. If a TSR Right has not vested at the end of the third performance period, it will lapse. There is no further re-testing after the third performance period. Number of rights to vest • 15% of the EPS Rights will vest if the minimum EPS growth • 15% of the TSR Rights will vest if the minimum TSR growth hurdle condition of 15% EPS CAGR is achieved over the relevant performance period; hurdle condition of 15% TSR CAGR is achieved over the relevant performance period; • 100% of the EPS Rights will vest if the EPS growth hurdle of 25% EPS CAGR is achieved over the relevant performance period; and • 100% of the TSR Rights will vest if the TSR growth hurdle of 25% TSR CAGR is achieved over the relevant performance period; and • if the EPS CAGR is within the range of 15% to 25% EPS CAGR, the number of EPS Rights that will vest will be pro-rated on a straight-line basis. • if the TSR CAGR is within the range of 15% to 25% TSR CAGR, the number of TSR Rights that will vest will be pro-rated on a straight-line basis. Treatment on cessation of employment Upon resignation, a participant’s unvested rights will lapse. In addition, in instances where the participant’s employment was terminated for cause or as a result of unsatisfactory performance, unvested rights will lapse. In other circumstances, a person ceasing employment may retain unvested rights with vesting to be tested at the end of the relevant performance period. However, in all cases, the Board has discretion to permit a participant to retain unvested Rights, including a discretion to reduce the number of retained unvested Rights to reflect the part of the performance period for which the participant was employed. Shareholder approval has been obtained for the purposes of sections 200B and 200E of the Corporations Act to permit the Company to give a benefit to a participant who holds a managerial or executive office in these circumstances. This approval was expressed to be for the period up to the 2018 annual general meeting. Treatment on change of control Generally, in the event of a change of control of the Company, unvested rights will vest on a pro rata basis having regard to the proportion of the performance period that has passed and after testing the relevant performance conditions at that time. The Board has discretion to determine whether a change in control has occurred and the treatment of the rights at that time. Other conditions Subject to the ASX Listing Rules (where relevant), a participant may only participate in new issues of shares or other securities if the right has been exercised in accordance with its terms and shares are issued or transferred and registered in respect of the right on or before the record date for determining entitlements to the issue. Participants will also be entitled to receive an allocation of additional shares as an adjustment for bonus issues. 15 ANNUAL FINANCIAL REPORT 2016 3.4 GENERAL EMPLOYEE SHARE PLAN The General Employee Share Plan (GES Plan) is part of the Company’s overall remuneration policy to reward Baby Bunting employees, from time to time. The GES Plan provides for grants of shares to eligible employees of the Company up to a value determined by the Board. The first offer made under this plan occurred in conjunction with the Company’s IPO and eligible employees each received 714 shares for no monetary consideration in conjunction with the Company’s IPO. The Board intends making grants under the GES Plan in the future to eligible employees to reward sustainable financial performance. Shares acquired under the GES Plan are subject to disposal restrictions having regard to applicable Australian tax legislation (currently, shares granted cannot be dealt with by a participant until the earlier of three years after the date of grant or the day after the day the participant ceases to be an employee). 4. RELATIONSHIP BETWEEN REMUNERATION AND THE COMPANY’S PERFORMANCE The following table shows key performance indicators for the Company over the last three years. 2016 $’000 2015 $’000 2014 $’000 EBITDA (statutory) 15,743 11,982 8,573 Net profit after tax (statutory) 8,334 6,040 4,064 Dividends per share – ordinary (cps) Dividends per share – special (cps) Basic Earnings per share (cents) 6.3 15.0 7.0 – – – – 6.2 4.2 5. NON-EXECUTIVE DIRECTOR REMUNERATION POLICY Under the Company’s Constitution, the Directors decide the total amount paid to all Non-executive Directors as remuneration for their services as a Director, but the total amount paid to all Non- executive Directors must not exceed in aggregate in any financial year $1,000,000 (being the amount specified in the Constitution) or any other amount fixed by the Company in general meeting. Currently, the aggregate fee cap is $1,000,000 (inclusive of superannuation contributions). Annual Non-executive Directors’ fees (inclusive of superannuation contributions) currently agreed to be paid by the Company are $120,000 to the Chairman, Barry Saunders, and $65,000 to each of the remaining Non-executive Directors. In addition, the Chairman of the Audit and Risk Committee is entitled to $15,000 annually and the Chairman of the Remuneration and Nomination Committee is entitled to $15,000 annually. Other committee members receive $5,000 per annum for serving on each of the Audit and Risk Committee and the Remuneration and Nomination Committee. The remuneration must not include a commission on, or a percentage of, operating revenue. Superannuation contributions provided by the Company are included in these amounts. For the financial year ended 26 June 2016, the fees paid and superannuation contributions to all Non-executive Directors were approximately $400,000 in aggregate. The Non-Executive Directors are not entitled to participate in any of the Company’s employee incentive plans. 6. DETAILS OF REMUNERATION FOR NON-EXECUTIVE DIRECTORS AND DISCLOSED EXECUTIVES Details of the remuneration of the Directors and other key management personnel of the Company are set out in the following tables. In line with Corporations Regulation 2M.3.03, the Company has elected not to disclose comparative amounts, as it was not listed on ASX during the previous financial year. 16 REMUNERATION REPORTBABY BUNTING GROUP LIMITED Short term employee benefits Post- employment benefits Long term benefits Share based payments4 Salary & fees3 $ STI and other fees $ Non- monetary benefits $ Super- annuation $ Long service leave $ LTI Plan rights5 $ Historical share options6 $ TOTAL7 $ Performance related % Options and rights as proportion of remuneration % 2016 Non-executive Directors Barry Saunders 112,179 Ian Cornell Tom Cowan1 Gary Levin Melanie Wilson (appointed 15 February 2016) Tamalin Morton (retired 12 February 2016) Arnold Nadelman (retired 24 July 2015) Grant Nadelman2 (retired 24 July 2015) Hamish Corlett2 (retired 11 August 2015) Disclosed executives 60,590 74,792 63,839 21,690 32,403 2,308 – – – – – – – – – – – 2,164 10,657 – – – – – – – – 5,756 – 6,065 2,061 3,078 219 – – – – – – – – – – – – – – – – – – – – 48,7078 173,707 28.0% 28.0% – – – 66,346 74,792 69,904 – 23,751 – – – – 35,481 2,527 – – – – – – – – – – – – – – – – – – Matt Spencer 427,838 124,656 8,754 19,549 12,388 47,756 212,448 853,389 Darin Hoekman 264,028 81,993 7,500 19,308 1,082 17,511 71,357 462,779 45.1% 36.9% 30.5% 19.2% 1. Fees payable to Tom Cowan were paid to TDM Asset Management Pty Ltd. Accordingly, Tom is responsible for his own superannuation arrangements. 2. Grant Nadelman (retired 24 July 2015) was an alternate director for Arnold Nadelman and Hamish Corlett (retired 11 August 2015) was an alternate director for Tom Cowan. Alternate directors were not remunerated directly by the Company during the financial year. 3. Amount includes the value of annual leave accrued during the financial year. 4. The value of the LTI Plan rights and Historical share options has been calculated in accordance with applicable accounting standards. 5. The value of the LTI Plan rights included as remuneration in the table represents the aggregate of amounts determined for both market based and non-market based performance hurdles. 6. The value reflects the cost of the historical share options plan which was accelerated when the IPO of shares of the Company became probable and holders committed to exercising their share options. 7. There were no termination benefits paid or payable during the current financial year. 8. Options had been granted to Barry Saunders in connection with his service as executive chairman in the period before the appointment of Matt Spencer as CEO and Managing Director. 7. EMPLOYMENT CONTRACTS Each executive has an employment contract specifying, among other things, remuneration arrangements, benefits, notice periods and other terms and conditions. The contracts provide that participation in the STI and LTI arrangements are at the Board’s discretion. The employment contracts do not have a fixed term. Employment may be terminated by the executive with notice, or by the Company with notice or by payment in lieu of notice, or with immediate effect in circumstances including serious or wilful misconduct. Executive Matt Spencer Darin Hoekman Note: the base salaries (including superannuation) quoted above are those in effect as at 26 June 2016. Annual Base Salary including superannuation Termination – notice by Executive Termination – notice by Company or payment in lieu $446,490 12 months 12 months $278,240 6 months 6 months 17 ANNUAL FINANCIAL REPORT 2016 8. EQUITY INSTRUMENTS HELD BY KEY MANAGEMENT PERSONNEL The tables below show the number of shares, performance rights and options in the Company that were held during the financial year by key management personnel, including close members of their family and entities related to them. No amounts remain unpaid in respect of the ordinary shares at the end of the financial year. Half of the performance rights in the table above are subject to the TSR performance condition and the other half are subject to the EPS performance condition. The fair value of the TSR performance rights granted to the disclosed executives is $0.12. The fair value of the TSR component of performance rights is determined at grant date using a Monte-Carlo simulation. For the EPS performance rights, the fair value is determined with reference to the share price of ordinary shares at grant date ($1.40). Ordinary shares Options Shares held by key management personnel, including close members of their family and entities related to them. Balance at the start of the year Net change Balance at the end of year 2016 Non-executive Directors Barry Saunders 3,419,818 777,291 4,197,109 Ian Cornell Tom Cowan Gary Levin Melanie Wilson (appointed 15 February 2016) Tamalin Morton (retired 12 February 2016) Arnold Nadelman (retired 24 July 2015) Disclosed executives 610,000 – 610,000 45,474,846* (8,573,543) 36,901,303* 610,000 (122,000) 488,000 – 49,193 – – – 49,193 14,658,781 (9,500,000) 5,158,781 Matt Spencer Darin Hoekman 122,848 2,364,284 2,487,132 37,000 400,000 437,000 * Tom Cowan is a partner of TDM Asset Management. It holds shares directly and has an indirect interest in the shares held by its clients by virtue of the control it exercises in relation to the shares under its investment management arrangements with its clients. Performance rights The CEO and Managing Director and the Chief Financial Officer were granted performance rights on 14 October 2016. These were granted under the Company’s LTI Plan. 2016 Value of rights granted during the year Number of rights granted as compen- sation Number of rights held at end of year (all unvested) Matt Spencer $1,430,103 1,881,714 1,881,714 Darin Hoekman $524,371 689,962 689,962 Under the LTI Plan, Matt Spencer and Darin Hoekman were each granted performance rights in FY2016. Details of the performance conditions and performance periods for those rights are set out in section 3.3 (Long term incentive plan) above. During the financial year, details of the options held by members of the key management personnel are set out in the table below. These options had been granted in the period from 2011 to 2015 in accordance with the Company’s former remuneration and incentive arrangements. All of the options held by key management personnel were exercised during the financial year prior to the Company’s IPO. 2016 Non- executive Director Barry Saunders Disclosed executives Matt Spencer Darin Hoekman Balance at the start of the year Net change Value of options exercised Balance at the end of the year 2,338,9241 (2,338,924) $1,640,636 2,350,000 (2,350,000) $1,657,500 400,000 (400,000) $280,000 – – – 1. Options were granted to Barry Saunders in connection with his service as executive chairman in the period before the appointment of Matt Spencer as CEO and Managing Director. The value of the options exercised during the year is calculated based on the value of the option at the time it is exercised multiplied by the number of options exercised. There are no options over shares on issue as at the date of this Directors’ Report. 9. LOANS TO KEY MANAGEMENT PERSONNEL The Company has entered into agreements with Matt Spencer and Darin Hoekman (and certain other executives) to, if requested, provide a loan on a limited recourse basis. Further details of the loans are set out in the Financial Statements (at Note 20). As at the date of this report, no amounts have been advanced under these loans. This is the end of the Remuneration Report. 18 REMUNERATION REPORTBABY BUNTING GROUP LIMITED Deloitte Touche Tohmatsu ABN 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia DX: 111 Tel: +61 (03) 9671 7000 Fax: +61 (03) 9671 7001 www.deloitte.com.au 12 August 2016 The Board of Directors Baby Bunting Group Limited 955 Taylors Rd Dandenong South VIC 3175 Dear Board Members Baby Bunting Group Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Baby Bunting Group Limited. As lead audit partner for the audit of the financial statements of Baby Bunting Group Limited for the financial year ended 26 June 2016, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Gerard Belleville Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 19 AUDITOR’S INDEPENDENCE DECLARATIONANNUAL FINANCIAL REPORT 2016 CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes In Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Note 1: Reporting entity Note 2: Significant accounting policies Note 3: Revenue Note 4: Profit for the year Note 5: Income Tax Note 6: Other receivables Note 7: Inventory Note 8: Other assets Note 9: Plant and equipment Note 10: Intangible assets and goodwill Note 11: Deferred tax assets Note 12: Payables Note 13: Loans and Borrowings Note 14: Provisions Note 15: Issued capital Note 16: Dividends Note 17: Retained earnings Note 18: Segment information Note 19: Share based payments Note 20: Related Party Transactions Note 21: Commitments for expenditure Note 22: Financial instruments – Fair values and risk management Note 23: Notes to the statement of cash flows Note 24: Parent entity disclosures Note 25: Group entities Note 26: Earnings per share Note 27: Remuneration of auditors Note 28: Subsequent Events Directors’ Declaration Independent Auditor’s Report 20 21 22 23 24 25 25 25 30 30 31 31 31 31 32 33 34 35 35 35 36 36 37 37 38 42 43 44 47 48 48 49 50 50 51 52 BABY BUNTING GROUP LIMITED Revenue Cost of sales Gross profit Other revenue Store expenses Marketing expenses Warehousing expenses Administrative expenses IPO transaction costs expensed Finance costs Change in fair value of interest rate swap Profit before tax Income tax expense Profit after tax Other comprehensive income for the year Total comprehensive income for the year Profit for the year attributable to: Equity holders of Baby Bunting Group Limited Earnings per share From continuing operations Basic (cents per share) Diluted (cents per share) Notes to the consolidated financial statements are included in Pages 25 to 50. Note 2016 $’000 2015 $’000 3 3 4 4 4 15 4 5 236,840 180,175 (155,678) (118,314) 81,162 61,861 21 45 (48,305) (37,833) (3,983) (3,540) (10,895) (1,876) (397) – (3,054) (3,316) (8,073) – (807) 205 12,187 9,028 (3,853) 8,334 – 8,334 (2,988) 6,040 – 6,040 8,334 6,040 26(a) 26(b) 7.0 7.0 6.2 6.2 21 CONSOLIDATED STATEMENT OF PROFIT OR LOSSAND OTHER COMPREHENSIVE INCOME for the year ended 26 June 2016ANNUAL FINANCIAL REPORT 2016 Note 26 June 2016 $’000 28 June 2015 $’000 23(b) 6 7 8 9 10 10 11 12 14 14 12 13 14 12 15 19 17 7,363 8,135 3,568 5,834 41,042 35,492 771 281 57,311 45,175 17,005 14,902 903 44,180 3,361 65,449 – 44,180 2,071 61,153 122,760 106,328 23,828 19,566 844 2,267 135 2,439 1,667 45 27,074 23,717 – 260 2,702 2,962 30,036 92,724 7,950 261 2,386 10,597 34,314 72,014 84,420 55,070 132 8,172 92,724 989 15,955 72,014 CURRENT ASSETS Cash and cash equivalents Other receivables Inventories Other assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and equipment Intangibles Goodwill Deferred tax assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Current tax liabilities Provisions Operating lease provision TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Borrowings Provisions Operating lease provision TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Share based payments reserve Retained earnings TOTAL EQUITY Notes to the consolidated financial statements are included in Pages 25 to 50. 22 CONSOLIDATED STATEMENT OF FINANCIAL POSITIONas at 26 June 2016BABY BUNTING GROUP LIMITED Balance at 29 June 2014 Profit for the year Other comprehensive income Total comprehensive income for the year Issue of shares (Note 15) Dividends (Note 16) Share based payment (Note 19) Balance at 28 June 2015 Balance at 28 June 2015 Profit for the year Other comprehensive income Total comprehensive income for the year Issue of shares (Note 15, 19) Dividends (Note 16) Share based payment (Note 19) Balance at 26 June 2016 Issued Capital $’000 Share Based Payments Reserve $’000 53,538 76 – – – 1,532 – – 55,070 55,070 – – – – – – – – 913 989 989 – – – 29,350 (1,464) Total Equity $’000 Total Equity $’000 9,915 6,040 – 6,040 – – – 63,529 6,040 – 6,040 1,532 – 913 15,955 72,014 15,955 8,334 – 8,334 – 72,014 8,334 – 8,334 27,886 – – 84,420 – 607 132 (16,117) (16,117) – 607 8,172 92,724 Notes to the consolidated financial statements are included in Pages 25 to 50. 23 CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 26 June 2016ANNUAL FINANCIAL REPORT 2016 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Income tax paid Interest received Finance costs paid Transaction costs for listing Net cash (used in)/from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Note 2016 $’000 2015 $’000 258,418 196,899 (242,851) (188,583) (6,213) (2,673) 20 (420) (1,876) 7,078 18 (880) – 4,781 15 23(a) Payments for plant and equipment and intangibles 9, 10 (6,185) (6,047) Proceeds on sale of plant and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Transaction costs for issue of shares Dividends paid (Repayment of)/Proceeds from borrowings Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the financial year Cash and cash equivalents at end of the financial year Notes to the consolidated financial statements are included in Pages 25 to 50. 6 25 (6,179) (6,022) 15,19 15 16 23(b) 23(b) 28,717 (1,754) (16,117) (7,950) 2,896 3,795 3,568 7,363 1,532 – – (100) 1,432 191 3,377 3,568 24 CONSOLIDATED STATEMENT OF CASH FLOWSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 26 June 2016 NOTE 1: REPORTING ENTITY Baby Bunting Group Limited (the Company) is a company domiciled in Australia. The address of the Company’s registered office and its principal place of business is 955 Taylors Road, Dandenong South, Victoria 3175, Australia. The consolidated financial statements of the Company as at and for the year ended 26 June 2016 comprise the Company and its subsidiaries (together referred to as the “consolidated entity”). The consolidated entity is primarily involved in the retailing of baby merchandise. The Company was admitted to the official list of the Australian Securities Exchange (ASX) on 14 October 2015 under the ASX code ‘BBN’. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies have been adopted in the preparation and presentation of the financial report. A. Statement of Compliance These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the consolidated entity. Accounting Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the Company and the consolidated entity comply with International Financial Reporting Standards (IFRS). For the purposes of preparing the consolidated financial statement, the Company is a for-profit entity. The financial statements were authorised for issue by the directors on 12 August 2016. B. Basis of Preparation The consolidated financial statements have been prepared on the basis of historical cost, except for certain properties and financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. All amounts are presented in Australian dollars, unless otherwise noted. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. All amounts are presented in Australian dollars, unless otherwise noted. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the consolidated entity takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of AASB 2, leasing transactions that are within the scope of AASB 117, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in AASB 102 ‘Inventories’ or value in use in AASB 136 ‘Impairment of Assets’. The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, and in accordance with that Class Order amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated. c. Critical accounting judgements and key sources of estimation uncertainty In the application of the consolidated entity’s accounting policies, the directors are required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated. The value in use calculation requires the directors to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value. The key assumptions used in the value in use calculations are as follows: Forecasted sales growth of existing stores 3.0% for comparable store growth over a 5 year period Terminal sales growth rate 2.5% Forecasted gross margin Forecasted retail store expenses Average gross margins achieved in the period immediately before the forecast period Forecast increases correlate to the consumer price indices during the forecast period. The values assigned to the key assumption are consistent with external sources of information Post-tax weighted average cost of capital 11.8% 25 ANNUAL FINANCIAL REPORT 2016 NOTE 2: SIGNIFICANT ACCOUNTING F. Income Tax POLICIES (continued) The recoverable amount of the consolidated entity’s goodwill currently exceeds its carrying value. Reasonable possible changes that may occur to the assumptions used would not result in impairment. D. Basis of Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the consolidated entity’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the consolidated entity are eliminated in full on consolidation. E. Business Combinations Acquisitions of subsidiaries and businesses are accounted for using the purchase method. The consideration of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the consolidated entity in exchange for control of the business acquired. Acquisition related costs are recognised in the statement of profit or loss and other comprehensive income as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under AASB 3 ‘Business Combinations’ are recognised at their fair values at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the consideration of the business combination over the consolidated entity’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the consolidated entity’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the consideration of the business combination, the excess is recognised immediately in the statement of profit or loss and other comprehensive income. Income tax expense represents the sum of the tax currently payable and deferred tax. The Company is part of a tax consolidated group under Australian taxation law, of which the Company is the head entity. As a result the Company is subject to income tax through its membership of the tax consolidated group. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax- consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group (if any) are recognised by the Company (as head entity in the tax-consolidated group). Nature of tax funding arrangements and tax sharing agreements Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the terms of the tax funding arrangement, Baby Bunting Group Limited and the other entity in the tax- consolidated group have agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax-consolidated group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding arrangement. Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the consolidated statement of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The consolidated entity’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and 26 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the consolidated entity is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax liabilities and assets are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the consolidated entity intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the year Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. the effect of any changes recognised on a prospective basis. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis. The useful life for each class of asset is: Class of fixed asset Useful Life Plant and equipment 3 – 10 years Leasehold improvements 5 – 10 years I. Intangibles – Computer Software Intangible assets with finite lives (Computer Software) that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. J. Employee Benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Company in respect of services provided by employees up to reporting date. K. Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. G. Inventories L. Revenue Inventories are stated at the lower of cost and net realisable value. Costs are assigned to inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a weighted average cost formula basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs necessary to make the sale. H. Plant and Equipment Each class of plant and equipment is carried at cost less, where applicable, any accumulated depreciation. The depreciable amount of all fixed assets, are depreciated over their estimated useful lives. The estimated useful lives and depreciation methods are reviewed at the end of each annual reporting period, with Revenue from the sale of goods is recognised at the point of sale. All revenue is stated net of the amount of goods and services tax (GST), returns and discounts. Revenue from lay by sales is recognised at the point of sale. This approach is taken as experience indicates that most lay by sales are consummated, the customer has paid a significant deposit and the goods are on hand, identified and ready for delivery to the customer. The balance owing on outstanding lay by sales is recognised as a receivable at balance date. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. 27 ANNUAL FINANCIAL REPORT 2016 NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (continued) M. Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: • where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or • for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. N. Leases Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. All other leases are classified as operating leases. Operating lease payments are recognised as an expense on a straight-line basis over the lease term. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. O. Goodwill Goodwill acquired in a business combination is initially measured at its cost, being the excess of the cost of the business combination over the consolidated entity’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised at the date of the acquisition. Goodwill is subsequently measured at its cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the consolidated entity’s cash-generating units, or groups of cash-generating units, expected to benefit from the synergies of the business combination. Cash-generating units or groups of cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the cash-generating unit (or groups of cash-generating units) is less than the carrying amount of the cash- generating unit (or groups of cash-generating units), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or groups of cash-generating units) and then to the other assets of the cash generating units pro- rata on the basis of the carrying amount of each asset in the cash- generating unit (or groups of cash-generating units). An impairment loss recognised for goodwill is recognised immediately in the statement of profit or loss and other comprehensive income and is not reversed in a subsequent period. P. Financial assets Financial assets are classified as follows depending on the nature and purpose of the financial assets and are determined at the time of initial recognition. Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method less impairment. Interest is recognised by applying the effective interest rate. Investments in subsidiaries Investments in subsidiaries are measured at cost using the effective interest method less impairment. Q. Trade Payables Trade payables and other accounts payable are recognised when the Company becomes obliged to make future payments resulting from the purchase of goods and services. R. Financial liabilities Financial liabilities Financial liabilities are classified as either financial liabilities at fair value through profit & loss (FVTPL) or ‘other financial liabilities’. Financial liabilities at FVTPL Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading if: • it has been acquired principally for the purpose of repurchasing it in the near term; or • on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or • it is a derivative that is not designated and effective as a hedging instrument. A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or 28 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED W. New and amended Standards and Interpretations adopted New and amended Standards and Interpretations effective for the current reporting period did not have any financial impact on the current reporting period or the prior comparative reporting period. X. Standards and Interpretations in issue not yet adopted At the date of authorisation of the financial statements, the Standards and Interpretations listed below which may be relevant to the consolidated entity were in issue but not yet effective. Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2018 June 2019 1 January 2018 June 2019 Standard/Interpretation AASB 9 ‘Financial Instruments’, and the relevant amending standards AASB 15 ‘Revenue from Contracts with Customers’ and AASB 2014-5 ‘Amendments to Australian Accounting Standards arising from AASB 15’ AASB 16 ‘Leases’ 1 January 2019 June 2020 AASB 2015-1 ‘Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012- 2014 Cycle’ AASB 2015-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101’ 1 January 2016 June 2017 1 January 2016 June 2017 The consolidated entity has not yet determined the potential effect, if any, of the new and amending standards and interpretations on the consolidated entity’s financial report. • it forms part of a contract containing one or more embedded derivatives, and AASB 139 ‘Financial Instruments: Recognition and Measurement’ permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the ‘other gains and losses’ line item in the statement of profit or loss and other comprehensive income. Other financial liabilities Other financial liabilities, including borrowings and trade and other payables, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The consolidated entity derecognises financial liabilities when, and only when, the consolidated entity’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. S. Borrowing Costs Borrowing costs are recognised as expenses in the period in which they are incurred. T. Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of profit or loss and other comprehensive income over the period of the borrowings using the effective interest rate. U. Store opening costs Costs associated in the setup of a new store are expensed in the period in which they are incurred. V. Comparative amounts The comparative figures are for the period 30 June 2014 to 28 June 2015. 29 ANNUAL FINANCIAL REPORT 2016 NOTE 3: REVENUE An analysis of the consolidated entity’s revenue for the year, is as follows: Revenue from sale of goods Other revenue Interest revenue Profit on sale of equipment Total other revenue NOTE 4: PROFIT FOR THE YEAR Profit before income tax expense includes the following expenses: Interest and finance charges paid/payable Depreciation and amortisation Rental expenses relating to operating leases: Minimum lease payments Employee benefits expense Loss on disposal of fixed assets Depreciation and amortisation 2016 $’000 2015 $’000 236,840 180,175 20 1 21 20 25 45 236,861 180,220 2016 $’000 397 3,179 14,911 36,619 – 2015 $’000 807 2,372 12,010 26,845 – Depreciation and amortisation is disclosed in the Consolidated Statement of Profit or Loss and Other Comprehensive Income under “Store expenses”, “Warehousing expenses” and “Administrative expenses” as detailed below: For the year ended 28 June 2015 Store expenses Warehousing expenses Administrative expenses Total For the year ended 26 June 2016 Store expenses Warehousing expenses Administrative expenses Total 30 Depreciation and amortisation $’000 Excluding Depreciation and mortisation $’000 As reported $’000 (37,833) 1,859 (35,974) (3,316) (8,073) 139 374 (3,177) (7,699) (49,222) 2,372 (46,850) (48,305) (3,540) (10,895) (62,740) 2,657 (45,648) 183 339 3,179 (3,357) (10,556) (59,561) NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED NOTE 5: INCOME TAX Current tax Deferred tax Total tax expense 2016 $’000 3,747 106 3,853 2015 $’000 3,089 (101) 2,988 The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax (expense)/benefit in the financial statements as follows: Profit before tax from continuing operations Income tax expense calculated at 30% (2015: 30%) Non-deductible expenditure Income tax expense recognised in profit or loss 2016 $’000 12,187 (3,656) (197) (3,853) 2015 $’000 9,028 (2,708) (280) (2,988) The tax rate used for 2016 and 2015 in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. NOTE 6: OTHER RECEIVABLES Current Lay by receivables Other receivables 2016 $’000 6,514 1,621 8,135 2015 $’000 4,612 1,222 5,834 The average lay by period is 3 months. No interest is charged on lay by accounts. There are no customers who represent more than 5% of the total balance of receivables. There are no material receivables past due date. NOTE 7: INVENTORY Finished goods NOTE 8: OTHER ASSETS Prepayments 2016 $’000 2015 $’000 41,042 35,492 2016 $’000 771 2015 $’000 281 31 ANNUAL FINANCIAL REPORT 2016 Leasehold improvements $’000 Plant and equipment $’000 Total $’000 2,641 794 (3) – 16,428 19,069 5,253 (219) – 6,047 (222) – 3,432 21,462 24,894 (944) (257) 3 – (1,198) 2,234 (6,898) (2,115) 219 – (8,794) 12,668 Leasehold improvements $’000 Plant and equipment $’000 3,432 1,229 – – 21,462 4,268 (26) (673) (7,842) (2,372) 222 – (9,992) 14,902 Total $’000 24,894 5,497 (26) (673) 4,661 25,031 29,692 (1,198) (398) – – (8,794) (2,577) 21 259 (9,992) (2,975) 21 259 (1,596) (11,091) (12,687) 3,065 13,940 17,005 NOTE 9: PLANT AND EQUIPMENT Cost Balance at 29 June 2014 Additions Disposals Transfers Balance at 28 June 2015 Accumulated depreciation Balance at 29 June 2014 Depreciation Disposals Transfers Balance at 28 June 2015 Carrying amount as at 28 June 2015 Cost Balance at 28 June 2015 Additions Disposals Transfers Balance at 26 June 2016 Accumulated depreciation Balance at 28 June 2015 Depreciation Disposals Transfers Balance at 26 June 2016 Carrying amount as at 26 June 2016 32 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED NOTE 10: INTANGIBLE ASSETS AND GOODWILL Cost Balance at 29 June 2014 Balance at 28 June 2015 Amortisation and impairment losses Balance at 29 June 2014 Balance at 28 June 2015 Carrying amount as at 28 June 2015 Cost Balance at 28 June 2015 Additions Transfers Goodwill $’000 Computer Software $’000 44,180 44,180 – – 44,180 – – – – – Goodwill $’000 Computer Software $’000 44,180 – – – 688 673 Total $’000 44,180 44,180 – – 44,180 Total $’000 44,180 688 673 Balance at 26 June 2016 44,180 1,361 45,541 Amortisation and impairment losses Balance at 28 June 2015 Amortisation Transfers Balance at 26 June 2016 Carrying amount as at 26 June 2016 – – – – 44,180 – (204) (254) (458) 903 – (204) (254) (458) 45,083 Refer to Note 2 for detail on the inputs used in the impairment calculation of goodwill. 33 ANNUAL FINANCIAL REPORT 2016 NOTE 11: DEFERRED TAX ASSETS Deferred tax balances are presented in the consolidated statement of financial position as follows: Deferred tax assets Deferred tax liability 2015 – Consolidated Employee benefits Non-deductible accruals Non-assessable lay by gross profit Inventories Gift vouchers Operating lease provision Interest rate swap 2016 – Consolidated Employee benefits Non-deductible accruals Non-assessable lay by gross profit Inventories Gift vouchers Operating lease provision Interest rate swap IPO transaction costs – listing IPO transaction costs – issuance of new shares 2016 $’000 3,522 (161) 3,361 2015 $’000 2,218 (147) 2,071 Opening balance ($’000) Recognised in profit or loss ($’000) Recognised in other compreh- ensive income ($’000) Recognised directly in equity ($’000) Reclassified from equity to profit or loss ($’000) Acquisitions /disposals ($’000) Other ($’000) Closing balance ($’000) 144 77 (275) 74 57 85 (61) 101 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 579 210 (147) 459 241 729 – 2,071 Opening balance ($’000) Recognised in profit or loss ($’000) Recognised in other compreh- ensive income ($’000) Recognised directly in equity ($’000) Reclassified from equity to profit or loss ($’000) Acquisitions /disposals ($’000) Other ($’000) Closing balance ($’000) 179 57 (14) 17 58 122 – 450 – 869 – – – – – – – – – – – – – – – – – – 421 421 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 758 267 (161) 476 299 851 – 450 421 3,361 435 133 128 385 184 644 61 579 210 (147) 459 241 729 – – – Total 1,970 Total 2,071 34 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED NOTE 12: PAYABLES Current Trade payables Gift voucher payables Sundry payables and accruals Operating lease provision Operating lease provision – Current Operating lease provision – Non-current 2016 $’000 2015 $’000 17,889 14,318 998 4,941 802 4,446 23,828 19,566 135 2,702 2,837 45 2,386 2,431 The operating lease provision reflects the recognition of rental expenses and lease incentives on a straight-line basis over the lease term. NOTE 13: LOANS AND BORROWINGS Non-current – Secured Bank Loan 2016 $’000 2015 $’000 – 7,950 The ongoing funding requirements of the consolidated entity are provided by the National Australia Bank (“NAB”). The secured multi option facility matures on 31 December 2017. Security consists of a Deed of Charge over the assets of Baby Bunting Pty Ltd. The Company is a guarantor to the facility. The total facility limit at balance date was $26,000,000, consisting of $20,000,000 market rate facility and $6,000,000 bank guarantee facility. The market rate facility can be drawn to the lesser of $20,000,000 or 2.00 times the last 12 months historical rolling EBITDA. Interest on the facility is charged at a variable rate. The consolidated entity is in compliance with its facility agreement at 26 June 2016. The current facility does not require the consolidated entity to amortise borrowings. NOTE 14: PROVISIONS Current Current tax liability Employee benefits Non-current Employee benefits 2016 $’000 844 2,267 3,111 2015 $’000 2,439 1,667 4,106 260 261 35 ANNUAL FINANCIAL REPORT 2016 NOTE 15: ISSUED CAPITAL Fully paid ordinary shares Balance at beginning of the year Issue of shares – IPO Issue of shares – Options exercised Issue of shares – Employee Gift Offer Transaction costs recognised in equity, net of tax 26 June 2016 28 June 2015 No. $’000 No. $’000 97,528,411 55,070 95,659,943 53,538 17,857,073 25,000 – 9,919,178 5,181 1,868,468 283,458 – 397 (1,228) – – – 1,532 – – Balance at end of the year 125,588,120 84,420 97,528,411 55,070 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Initial Public Offering On 14 October 2015, the Company was admitted to the official list of the Australian Securities Exchange (ASX). The settlement of the issue or transfer of shares as part of the Company’s initial public offering on 14 October 2015 resulted in the issue of 17.857 million ordinary shares at the offer price of $1.40 per ordinary share. Transaction costs of $1.754 million were recognised directly in equity ($1.228 million, net of tax) which represent the portion of transaction costs attributable to the issuance of new shares. Transaction costs of $1.876 million attributable to the listing were recognised in the Consolidated Statement of Profit or Loss and Other Comprehensive Income in the current reporting period. NOTE 16: DIVIDENDS 2016 2015 $ per ordinary share $’000 $ per ordinary share $’000 Recognised amounts Special fully franked dividend – 14 October 2015 0.150 16,117 Unrecognised amounts Final fully franked dividend 0.063 7,912 – – – – During the current reporting period, a special fully franked dividend of 15.0 cents per ordinary share was declared for the existing shareholders immediately prior to the Initial Public Offering and paid at the completion of the Initial Public Offering. On 12 August 2016, the directors determined to pay a fully franked final dividend of 6.3 cents per share to the holders of fully paid ordinary shares in respect of the financial year ended 26 June 2016, to be paid to shareholders on 16 September 2016. The dividend has not been included as a liability in these consolidated financial statements. The record date for determining entitlements to the dividend is 26 August 2016. The total estimated dividend to be paid is $7.912 million. Company 2016 $’000 5,226 2015 $’000 5,874 Adjusted franking account balance 36 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED NOTE 17: RETAINED EARNINGS Retained earnings Balance at beginning of year Profit attributable to owners of the Company Payment of dividends – special fully franked dividend Balance at end of year NOTE 18: SEGMENT INFORMATION 2016 $’000 15,955 8,334 (16,117) 2015 $’000 9,915 6,040 – 8,172 15,955 Management has determined the operating segments based on the reports reviewed by the CEO and Managing Director (the chief operating decision maker as defined under AASB 8) that are used to make strategic and operating decisions. The CEO and Managing Director considers the business primarily from a geographic perspective. On this basis management has identified one reportable segment, Australia. The consolidated entity does not operate in any other geographic segment. The following is an analysis of the consolidated entity’s revenue and results from continuing operations by reportable segment: Revenue Operating EBIT Total segment assets Additions to plant and equipment and intangibles Depreciation and amortisation Total non-current assets1 Total segment liabilities Australia 2016 $’000 2015 $’000 Total 2016 $’000 2015 $’000 236,840 180,175 236,840 180,175 15,774 10,493 15,774 10,493 122,760 106,328 122,760 106,328 6,185 3,179 62,088 30,036 6,047 2,372 59,082 34,314 6,185 3,179 62,088 30,036 6,047 2,372 59,082 34,314 1. Non-current assets exclude financial instruments, deferred tax assets and deferred tax liabilities. Revenue reported above represents revenue generated from external customers. There were no inter-segment sales in the current reporting period (2015: nil). The accounting policies of the reportable segment are the same as the consolidated entity’s accounting policies described in Note 2. The CEO and Managing Director assesses the performance of the operating segment based on a measure of Operating EBIT. This measure basis excludes the effects of interest revenue, finance costs, income tax, change in fair value of interest rate swap, other non- operating costs and associated indirect tax costs. 37 ANNUAL FINANCIAL REPORT 2016 NOTE 18: SEGMENT INFORMATION (continued) Operating EBIT A reconciliation of operating EBIT to profit before tax is provided as follows: Operating EBIT Interest revenue Finance costs Change in fair value of interest rate swap IPO transaction costs recognised in consolidated statement of profit or loss and other comprehensive income (Note 15) Employee share based payments (inclusive of indirect tax) Profit before tax 2016 $’000 2015 $’000 15,774 10,493 20 (397) – (1,876) (1,334) 12,187 20 (807) 205 – (883) 9,028 Segment assets and liabilities The amounts provided to the CEO and Managing Director with respect to total assets and liabilities are measured in a manner consistent with that of the financial statements. Reportable segments’ assets and liabilities are reconciled to total assets as follows: Segment assets Total assets as per the balance sheet Segment liabilities Total liabilities as per the balance sheet NOTE 19: SHARE BASED PAYMENTS Share based payments reserve Balance at beginning of year Historical share options – expense (Note 19c) Historical share options – exercised Performance rights – expense (Note 19a) Balance at end of year 26 June 2016 $’000 28 June 2015 $’000 122,760 106,328 122,760 106,328 30,036 30,036 34,314 34,314 2016 $’000 989 475 (1,464) 132 132 2015 $’000 76 913 – – 989 A. Performance rights In the current reporting period, the consolidated entity established a Long Term Incentive Plan (LTI Plan) involving the grant of performance rights. Upon vesting, each right entitles the participant to one fully paid ordinary share in the Company. No dividends or voting rights are attached to performance rights prior to vesting. The number of rights in a grant that vest will be determined by reference to two performance conditions. Half of the rights granted are subject to an earnings per share (EPS) growth performance condition (EPS Rights). The other half of the rights granted are subject to a total shareholder return (TSR) growth performance condition (TSR Rights). 38 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED Fair value of performance rights granted during the year The weighted average fair value of the performance rights TSR component granted under the LTI Plan is $0.17 (2015: nil). The fair value of the TSR component of performance rights is determined at grant date using a Monte-Carlo simulation. For the non-market component (EPS CAGR), the fair value is determined with reference to the share price of ordinary shares at grant date. Performance rights series 2016 – Series 1 (TSR) 2016 – Series 1 (EPS CAGR) 2016 – Series 2 (TSR) 2016 – Series 2 (EPS CAGR) Grant date 14 October 2015 14 October 2015 10 June 2016 10 June 2016 Grant date fair value Exercise price Expiry date $0.12 $1.40 $1.03 $2.45 nil nil nil nil (1) (1) (1) (1) 1. These performance rights vest and are automatically exercised at the end of the relevant service and performance period, subject to meeting the relevant performance condition. The Board will determine whether the relevant performance conditions have been satisfied. Any performance rights that have not vested at the end of the third performance period (which occurs following the release of the Company’s financial results for the 2020 financial year), will lapse. Grant date share price Exercise price Expected volatility Expected life Dividend yield Risk-free interest rate (p.a) Performance rights Series 2016 – Series 1 TSR 2016 – Series 2 TSR $1.40 (IPO offer price) nil 25% $2.45 nil 25% 3,4,5 years 2.3,3.3,4.3 years 4.50% 1.90% 4.50% 1.90% Movements in performance rights during the year The consolidated entity recorded a share based payments expense for performance rights of $0.132 million (2015: nil) disclosed in the Consolidated Statement of Profit or Loss and Other Comprehensive Income under “Administrative expenses”. The following reconciles the performance rights outstanding at the beginning and end of the year: Balance at beginning of year Granted during the year Forfeited during the year Exercised during the year Lapsed during the year Balance at end of year Exercisable at end of year June 2016 TSR Number of rights EPS Number of rights – – 2,665,762 2,665,762 – – – – – – 2,665,762 2,665,762 – – 39 ANNUAL FINANCIAL REPORT 2016 NOTE 19: SHARE BASED PAYMENTS (continued) B. General Employee Share Plan (“GESP”) In the current reporting period, the consolidated entity established the GESP which is intended to be part of the consolidated entity’s overall remuneration policy to reward Baby Bunting employees, from time to time. The GESP provides for grants of Shares to eligible employees of the consolidated entity up to a value determined by the Board. During the current reporting period, the Board issued a total of 283,458 shares (714 shares per eligible employee) in “the Employee Gift Offer” with no monetary consideration payable by participating eligible employees. Shares issued were subject to a disposal restriction in accordance with current Australian tax legislation. The fair value of $0.397 million was fully expensed at the time of granting, as there are no performance or service conditions. The GESP was established in the 2016 financial year. The plan did not operate, and no Shares were granted under it, in the 2015 financial year. C. Share options In the current reporting period, existing share options for executives and senior employees were exercised prior to the initial public offering of the Company. In accordance with the terms of the plan, each employee share option converted into one ordinary share of the Company on exercise. No amounts were payable by the recipient on grant date of the option. The options carried neither rights to dividends nor voting rights until exercise and conversion into ordinary shares of the Company. The following share options were in existence during the current and prior reporting periods: Grant date fair value Exercise price Expiry date Date exercised $0.29 $0.29 $0.55 $0.30 $0.25 $0.30 $0.29 $0.30 $0.82 $0.30 $0.50 30 November 2015 12 August 2015 30 November 2015 12 August 2015 25 October 2016 12 August 2015 14 October 2016 12 August 2015 14 October 2016 12 August 2015 14 October 2016 12 August 2015 17 September 2017 12 August 2015 14 November 2017 12 August 2015 19 December 2014 12 August 2015 1 March 2019 12 August 2015 11 July 2020 12 August 2015 Options series Grant date 2011 – Series 1 29 April 2011 2011 – Series 2 12 May 2011 2012 – Series 1 25 October 2011 2013 – Series 1 14 September 2012 2013 – Series 2 14 September 2012 2013 – Series 3 14 September 2012 2014 – Series 1 19 August 2013 2015 – Series 1 14 November 2014 $0.03 $0.03 $0.02 $0.07 $0.10 $0.07 $0.07 $0.53 2015 – Series 2 14 November 2014 – 2015 – Series 3 28 February 2015 2016 – Series 1 10 July 2015 $0.55 $0.50 40 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED Fair value of share options granted during the year The fair value of the share options granted during the year was $0.50 (2015 weighted average: $0.55). Options were priced using a Black- Scholes-Merton pricing model. Service and non-market performance conditions attached to the transactions were not taken into account in measuring fair value. Where relevant, the expected life used in the model has been adjusted based on management’s best estimate for the effects of non- transferability, exercise restrictions (including the probability of meeting market conditions attached to the option), and behavioural considerations. Expected volatility was based on an evaluation of the historical volatility of other comparable companies based on publically available information. Grant date share price Exercise price Expected volatility Expected option life (years) Dividend yield Risk-free interest rate (p.a.) Options Series 2016 – Series 1 $1.00 $0.50 25% 1 – 1.9% Movements in shares options during the year The consolidated entity recorded a share based payments expense for options of $0.475 million (2015: $0.913 million) disclosed in the Consolidated Statement of Profit or Loss and Other Comprehensive Income under “Administrative expenses”. The prior reporting period expense reflects the cost of the historical share options plan which was accelerated when the initial public offering of the Company became probable and the directors and senior executives committed to exercising their share options. All outstanding share options in existence (number of options: 9.9 million; exercise price: $0.25 to $0.55) were exercised prior to completion of the Initial Public Offering in October 2015. The following reconciles the share options outstanding at the beginning and end of the year: Balance at beginning of year Granted during the year Forfeited during the year Exercised during the year Lapsed during the year Balance at end of year Exercisable at end of year June 2016 June 2015 Weighted average exercise price $ $0.37 $0.50 – Number of options 9,819,178 100,000 – Number of options 7,869,178 3,818,468 – (9,919,178) $0.37 (1,868,468) – – – – – – – 9,819,178 – Weighted average exercise price $ $0.39 $0.55 – $0.82 – $0.37 – 41 ANNUAL FINANCIAL REPORT 2016 NOTE 19: SHARE BASED PAYMENTS (continued) C. Share options (continued) Share options exercised during the year The following share options were exercised during the year: Option series 2011 – Series 1 2011 – Series 2 2012 – Series 1 2013 – Series 1 2013 – Series 2 2013 – Series 3 2014 – Series 1 2015 – Series 1 2015 – Series 3 2016 – Series 1 Number exercised Exercise date Share price at exercise date $ 355,064 12 August 2015 554,114 12 August 2015 3,000,000 12 August 2015 2,000,000 12 August 2015 250,000 12 August 2015 1,050,000 12 August 2015 660,000 12 August 2015 1,550,000 12 August 2015 400,000 12 August 2015 100,000 12 August 2015 9,919,178 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 NOTE 20: RELATED PARTY TRANSACTIONS The immediate parent and ultimate controlling party of the consolidated entity is Baby Bunting Group Limited (incorporated in Australia). Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the consolidated entity and other related parties are disclosed below. A. Consultancy fee – Initial public offering Tom Cowan, a Baby Bunting Director, is a partner at TDM Asset Management. TDM Asset Management was engaged by the Company to provide advisory and other services in relation to the IPO. The Company has paid $300,000 (excluding disbursements and GST) for services provided in relation to the IPO. B. Loans to and from key management personnel and directors As at the end of the current reporting period (2015: nil), no loans were outstanding to or from key management personnel or directors of the consolidated entity. C. Historical option holder loans During the current reporting period, the Company provided limited recourse loans totalling $3,477,562 to historical option holders (including loans totalling $1,636,357 to key management personnel and other executives) to enable holders to exercise their options prior to the IPO. These loans were provided on a limited recourse and interest free basis. Loans were repaid immediately prior to the settlement of the IPO through the application of proceeds from the special dividend (refer Note 16), cash settlement and/or sale of shares into the IPO to satisfy the balance outstanding. 42 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED D. Loan arrangement with executives The Company has entered into an agreement with certain executives to, if requested by an executive, provide a loan to the person on a limited recourse basis. The maximum amount that may be advanced by the Company is $3 million. The request can be made during the period following the end of the escrow period for executives (being three days after the Company’s half-year results for the period ending 1 January 2017 or thereabouts are released to the ASX) until 30 April 2017. If the loan is requested and made, the money advanced can only be used to meet the tax liabilities of the executive that arose in connection with the executive acquiring shares before the date of the Prospectus for the IPO (as part of pre-existing equity incentives). Any loan is to be repaid as soon as practicable and no later than six months after the date of the advance (or such longer period as the Board may determine). Interest will be payable on any amount advanced equivalent to the interest rate payable on the Company’s finance facilities at that time. Funds will not be advanced where an executive has ceased to be an employee. Shareholders approved the entry into these arrangements in respect of the CEO and Managing Director before the date of the Prospectus for the initial public offering. E. Key management personnel compensation The aggregate compensation made to directors and KMP of the Company and the consolidated entity is set out below: Short-term employment benefits Post-employment benefits Other long-term benefits Termination benefits Historical options and long term incentive plan benefit NOTE 21: COMMITMENTS FOR EXPENDITURE Operating Lease Commitments Non-cancellable operating leases contracted for but not capitalised in the financial statements: Not later than one year Later than one year and not later than five years Later than five years The consolidated entity enters into operating leases for its retail outlets and related equipment such as forklifts. Capital Commitments The consolidated entity has capital commitments totalling nil (2015: nil). 2016 $ 2015 $ 1,284,734 1,811,439 66,693 13,470 – 133,154 17,482 – 397,779 849,847 1,762,676 2,811,922 2016 $’000 12,922 33,115 12,215 58,252 2015 $’000 12,204 33,802 10,442 56,448 43 ANNUAL FINANCIAL REPORT 2016 NOTE 22: FINANCIAL INSTRUMENTS – FAIR VALUES AND RISK MANAGEMENT The consolidated entity’s activities expose it to a variety of financial risks, including market risk (foreign currency and interest rate risk), liquidity risk and credit risk. The consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. There have been no changes to the consolidated entity’s exposure to financial risks or the manner in which it manages and measures these risks from the previous period. The consolidated entity holds the following financial assets and liabilities at reporting date: Financial assets Cash and cash equivalents Other receivables Financial liabilities Trade and other payables Borrowings – Market Rate Facility 2016 $’000 7,363 8,135 15,498 23,828 – 23,828 2015 $’000 3,568 5,834 9,402 19,566 7,950 27,516 A. Market risk i. Foreign exchange risk management The majority of the consolidated entity’s operations are transacted in the functional currency of the country of operation and are therefore not significantly exposed to foreign currency risk. Less than 10% of goods sourced by the consolidated entity are purchased directly in a foreign currency. However, the consolidated entity’s Australian-based suppliers have exposure to foreign currency, most notably the USD, providing the consolidated entity with a secondary currency exposure. A decrease in the exchange rate of AUD relative to the USD could result in increased costs of goods imported. Consequently, the consolidated entity is exposed to movements in the AUD/USD exchange rate should suppliers pass through to the consolidated entity movements in cost of goods attributed to foreign exchange. The consolidated entity has historically elected to pass on changes to the cost of goods from foreign exchange movements without adversely impacting sales or gross profit margin. ii. Cash flow and fair value interest rate risk The consolidated entity is exposed to interest rate risk as it borrows funds at floating interest rates. Any increase in interest rates will impact the consolidated entity’s costs of servicing these borrowings, which may adversely impact its financial position. iii. Summarised sensitivity analysis The following table summarises the sensitivity of the consolidated entity’s financial assets and financial liabilities to interest rate risk. The consolidated entity is using a sensitivity of 50 basis points as management considers this to be reasonable having regard to historic movements in interest rates. A positive number represents an increase in profit and a negative number a decrease in profit. At 28 June 2015 Financial liabilities Borrowings – Market Rate Facility Total increase/(decrease) 44 Interest rate risk -50bps +50 bps Profit $’000 Profit $’000 37 37 (37) (37) Carrying amount $’000 7,950 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED At 26 June 2016 Financial liabilities Borrowings – Market Rate Facility Total increase/(decrease) B. Liquidity risk Interest rate risk -50bps +50 bps Profit $’000 Profit $’000 24 24 (24) (24) Carrying amount $’000 – Ultimate responsibility for liquidity risk management rests with the Board, who assess the consolidated entity’s short, medium and long term funding and liquidity management requirements. The consolidated entity manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows. Financing arrangements The consolidated entity has access to the following undrawn borrowing facilities at the end of the reporting period: Market Rate Facility Bank Guarantee Facility Total Facility 2016 2015 Limit $’000 20,000 6,000 26,000 Utilised $’000 – 3,482 3,482 Limit $’000 20,000 6,000 26,000 Utilised $’000 7,950 3,220 11,170 Maturities of financial assets and financial liabilities The following tables detail the consolidated entity’s remaining contractual maturity for its financial assets and liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the consolidated entity can be required to pay. The table includes both principal and estimated interest cash flows. Cash flows for financial assets and liabilities without fixed amount or timing are based on the conditions existing at the reporting date. At 28 June 2015 Financial assets Cash and cash equivalents Other receivables Financial liabilities Trade and other payables Borrowings – Market Rate Facility Maturity Less than 6 months $’000 6 – 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total 3,568 5,834 9,402 19,566 – 19,566 – – – – – – – – – – – – – – – – 7,950 7,950 – – – – – – 3,568 5,834 9,402 19,566 7,950 27,516 Weighted average effective interest rate % 0.30% – – 4.22% 45 ANNUAL FINANCIAL REPORT 2016 NOTE 22: FINANCIAL INSTRUMENTS – FAIR VALUES AND RISK MANAGEMENT (continued) B. Liquidity risk (continued) Maturities of financial assets and financial liabilities (continued) Maturity Less than 6 months $’000 6 – 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total Weighted average effective interest rate % At 26 June 2016 Financial assets Cash and cash equivalents Other receivables Financial liabilities Trade and other payables Borrowings – Market Rate Facility 7,363 8,135 15,498 23,828 – 23,828 – – – – – – – – – – – – – – – – – – – – – – – – 7,363 8,135 15,498 23,828 0.28% – – – 3.69% 23,828 C. Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has endeavoured to minimise its credit risk by dealing with creditworthy counterparties and use of counterparty account based credit limits which are regularly reviewed against historical spending patterns for appropriateness. The consolidated entity does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any allowance for impairment, represents the consolidated entity’s maximum exposure to credit risk. D. Fair value of financial instruments The carrying amount of financial assets and financial liabilities recorded in the financial statements approximate their fair values. 46 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED NOTE 23: NOTES TO THE STATEMENT OF CASH FLOWS A. Reconciliation of profit/(loss) for the year to net cash flows from ordinary activities Profit after income tax Non-cash expenses and other adjustments: Depreciation and amortisation Share based payments (Profit)/Loss on disposal of equipment Tax effect of transaction costs recognised directly in equity Changes in assets and liabilities: Decrease/(Increase) in other receivables Decrease/(Increase) in prepayments Decrease/(Increase) in inventories Decrease/(Increase) in tax assets Increase/(Decrease) in trade and other payables Increase/(Decrease) in provisions Increase/(Decrease) in income tax liability Increase/(Decrease) in other financial liabilities Increase/(Decrease) in operating lease provision 2016 $ 8,334 3,174 1,004 (1) 526 (2,301) (489) (5,550) (1,291) 4,263 598 (1,595) – 406 2015 $ 6,040 2,372 913 (25) – (1,318) (20) (7,597) (101) 3,542 478 417 (205) 285 Net cash provided by operating activities 7,078 4,781 B. Reconciliation of Cash and Cash equivalents For the purposes of the statement cash flows, cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash on hand Cash at bank 2016 $’000 56 7,307 7,363 2015 $’000 49 3,519 3,568 47 ANNUAL FINANCIAL REPORT 2016 NOTE 24: PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ended 26 June 2016 the parent entity of the consolidated entity was Baby Bunting Group Limited. Result of parent entity: Profit for the year Other comprehensive income Total comprehensive income for the year Financial position of parent entity at year end: Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Issued capital Reserves Retained earnings Total equity Parent Entity 2016 $’000 2015 $’000 24,065 – 24,065 – – – – – 91,521 56,675 844 844 2,439 2,439 84,420 55,070 132 6,125 90,677 989 (1,823) 54,236 The Company does not have any contractual commitments for the acquisition of property, plant and equipment. NOTE 25: GROUP ENTITIES Baby Bunting Group Limited has two 100% owned subsidiaries, Baby Bunting Pty Ltd and Baby Bunting EST Pty Ltd. The investment in Baby Bunting Pty Ltd is $8,891,700 which represents the issued capital of the entity, together with the value of non cash costs associated with the acquisition of the business. The Company and Baby Bunting Pty Ltd have entered into a Deed of Cross Guarantee. Pursuant to ASIC Class Order 98/1418 (as amended), the wholly-owned subsidiary (Baby Bunting Pty Ltd) is relieved from the Corporations Act 2001 requirements for the preparation, audit and lodgment of Financial Reports. The effect of the deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of the subsidiary under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The Consolidated Statement of Profit and Loss and Other Comprehensive Income and Consolidated Statement of Financial Position of the consolidated entity approximates the forementioned statements comprising the company and subsidiary which are party to the deed as at the reporting date and therefore not presented. 48 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED Subsidiaries listing Proportion of ownership interest and voting power held by the Company Name of subsidiary Principal activity Place of incorporation and operation June 2016 June 2015 Baby Bunting Pty Ltd1 Retailing of baby merchandise Australia 100% 100% Baby Bunting EST Pty Ltd2 Trustee of the trust established in connection with the Company’s employee share plans Australia 100% – 1. This wholly-owned subsidiary has entered into a deed of cross guarantee with Baby Bunting Group Limited. Baby Bunting Pty Ltd became a party to the deed of cross guarantee on 19 June 2008. 2. Baby Bunting EST Pty Ltd has no material net assets or profit and the financial information disclosed in this report represents the financial information for the group entities party to the deed of cross guarantee. NOTE 26: EARNINGS PER SHARE Basic earnings per share from continuing operations1 Diluted earnings per share from continuing operations1 1. In the current and comparative reporting periods there were no discontinued operations. 2016 cents per share 2015 cents per share 7.0 7.0 6.2 6.2 A. Basic earnings per share The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Earnings used in the calculation of basic earnings per share from continuing operations1 2016 $’000 8,334 2015 $’000 6,040 Weighted average number of ordinary shares for the purposes of basic earnings per share 119,174 96,646 1. In the current and comparative reporting periods there were no discontinued operations. B. Diluted earnings per share The earnings used in the calculation of diluted earnings per share are as follows: Earnings used in the calculation of basic earnings per share from continuing operations1 2016 $’000 8,334 2015 $’000 6,040 The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Weighted average number of ordinary shares used in the calculation of basic earnings per share 119,174 96,646 Shares deemed to be issued for no consideration in respect of: – employee share options and performance rights 349 926 Weighted average number of ordinary shares used in the calculation of diluted earnings per share 119,523 97,572 1. In the current and comparative reporting periods there were no discontinued operations. 2016 $’000 2015 $’000 49 ANNUAL FINANCIAL REPORT 2016 NOTE 27: REMUNERATION OF AUDITORS Assurance Services Review of the financial report for the half-year Audit of the year-end financial report IPO due diligence Tax and Consulting Services Taxation services Other advisory services 2016 $ 2015 $ 19,500 85,000 210,000 314,500 16,920 16,000 32,920 19,000 70,000 – 89,000 14,123 3,675 17,798 Total remuneration 347,420 106,798 The auditors of the consolidated entity and the Company are Deloitte Touche Tohmatsu (Deloitte). From time to time, Deloitte provides other services to the consolidated entity and the Company, which are subject to the corporate govenernance procedures adopted by the Company. In the current year, the consolidated entity and the Company has engaged the services of other accounting firms to perform a variety of non-audit assignments. NOTE 28: SUBSEQUENT EVENTS Dividends on the Company’s ordinary shares A final dividend of 6.3 cents per fully paid ordinary shares has been determined for the year ended 26 June 2016 – refer Note 16. There have been no events subsequent to the date of this report which would have a material effect on the financial report of the consolidated entity at 26 June 2016. 50 NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSfor the year ended 26 June 2016BABY BUNTING GROUP LIMITED The Directors declare that: a. in their opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; b. in their opinion, the attached financial statements are in compliance with International Financial Reporting Standards, as stated in Note 2 to the financial statements; c. in their opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and d. the Directors have been given the declarations required by s.295A of the Corporations Act 2001. At the date of this declaration, the Company is within the class of companies affected by ASIC Class Order 98/1418. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the Directors’ opinion, there are reasonable grounds to believe that the Company and the company to which the ASIC Class Order applies, as detailed in Note 25 to the financial statements will, as a consolidated entity, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. Signed in accordance with a resolution of the Directors made pursuant to s.295(5) of the Corporations Act 2001. On behalf of the Directors Barry A E Saunders Chairman Melbourne: 12 August 2016 51 DIRECTORS’ DECLARATIONANNUAL FINANCIAL REPORT 2016 Deloitte Touche Tohmatsu ABN 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia DX: 111 Tel: +61 (03) 9671 7000 Fax: +61 (03) 9671 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of Baby Bunting Group Limited We have audited the accompanying financial report of Baby Bunting Group Limited, which comprises the statement of financial position as at 26 June 2016, the statement of profit or loss and other comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 21 to 51. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the consolidated financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the company’s preparation of the financial report that gives a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 52 INDEPENDENT AUDITOR’S REPORTBABY BUNTING GROUP LIMITED Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Baby Bunting Group Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Opinion In our opinion: (a) the financial report of Baby Bunting Group Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 26 June 2016 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 2. Report on the Remuneration Report We have audited the Remuneration Report included in pages 12 to 18 of the directors’ report for the year ended 26 June 2016. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion the Remuneration Report of Baby Bunting Group Limited for the year ended 26 June 2016, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Gerard Belleville Partner Chartered Accountants Melbourne, 12 August 2016 53 ANNUAL FINANCIAL REPORT 2016