Baby Bunting Annual Report 2022

Plain-text annual report

Annual Report 2022 Baby Bunting Group Limited ABN 58 128 533 693 a Baby Bunting Annual Report 2022Contents 8 14 16 20 23 36 55 77 78 124 125 130 133 Chair and CEO’s report Store network Sustainability The board Corporate governance statement Directors’ report Remuneration report Auditor’s independence declaration Financial report Directors’ declaration Independent auditor’s report Shareholder information Corporate directory The 2022 Baby Bunting Annual Report reflects Baby Bunting’s performance for the 52 week period from 28 June 2021 to 26 June 2022. The Baby Bunting Group Limited Annual Report is available online at babybunting.com.au/investor. Hard copies can be obtained by contacting the Company’s share registry. Vision: to be the most loved baby retailer for every family, everywhere. Notice of 2022 Annual General Meeting 10.00am (Melbourne time) Tuesday, 11 October 2022 Further details will be contained in the Notice of Annual General Meeting that will be made available in September 2022. 1 Baby Bunting Annual Report 2022 About Baby Bunting Baby Bunting Group Limited is Australia’s largest specialty maternity and baby goods retailer. We operate 65 stores in Australia and an online store, with a National Distribution Centre based in Dandenong South, Victoria. We have a network plan of over 110 stores throughout Australia. Baby Bunting sells goods online to customers in New Zealand, with our first physical store opened in New Zealand in August 2022, we have a network plan of more than 10 stores in New Zealand. Further information about Baby Bunting is available at babybunting.com.au/investor Supporting new and expectant parents is at the heart of everything we do. We feel honoured to be trusted by parents and caregivers who choose us to help them navigate this significant period in their lives. As we listen to the families we support, we continue to grow to meet their needs. Despite elements of uncertainty, we have worked hard to continue our expansion, bringing us closer to the hearts and homes of people throughout regional Australia and taking our first steps into New Zealand. No success is achieved in isolation, and so we want to take this opportunity to thank our suppliers and our business partners, who continue to work with us to achieve our purpose. A special thanks goes to our dedicated team members, both here in Australia and (excitingly) in New Zealand, who use their passion and expertise to support new and expectant families through all the big and little moments parenthood has to offer. Core Purpose: to support new and expectant parents in the early years of parenting. 2 2 Supporting new and expectant parents for more than 40 years. Baby Bunting Annual Report 2022 3 Baby Bunting Annual Report 2022Baby Bunting’s strategy 1 Invest to grow market share from our core business Supporting new and expectant parents 2 Invest in digital 3 Growth from new markets 4 Profit margin improvement 4 Invest to grow market share from Baby Bunting’s core business, including the roll out of new stores and formats, enhanced fulfilment, and new services to existing customers FY22 outcomes • Four new stores opened, two stores relocated and two stores refurbished • Expansion of store fulfilment hubs and online fulfilment stores (now fulfilling online orders from 23 stores) • 6 leases signed for stores opening in Australia in FY23 • Expanding our store network plan, now targeting more than 120 stores across Australia and New Zealand • Keeping our customers safe through the expansion of car seat fitting services • Expansion of our hire services Invest in digital to deliver the best possible retailing experience across channels and enable new business models FY22 outcomes • New loyalty program rolled out in FY22 with further expansion planned • New headless e-commerce architecture deployed • Online range expansion underway Growth from new markets leveraging Baby Bunting’s core competencies and data into adjacent categories, entering new geographies and expanding the value chain FY22 outcomes • New Zealand store operations launched – first store to open in August 2022 • Expansion of private label business under the brands JENGO, Bilbi and 4baby • Focus on expanding our total addressable market through greater online penetration Profit margin improvement by increasing scale, developing private label and exclusive products and leveraging infrastructure to reduce the cost of doing business FY22 outcomes • 45.3% of sales were from private label and exclusive products • First full year of National Distribution Centre operations – creating efficiencies and reducing 3PL requirements • Leveraging our investment in supply chain infrastructure to produce better margin outcomes • Cost leverage in retail expenses 5 Baby Bunting Annual Report 2022Performance highlights $507.3m Sales 8.3% Sales Growth $50.5m Pro forma EBITDA (Pre-AASB 16) Up 16.1% 1.4m Baby Bunting family members Baby Bunting family members now account for around 81% of Baby Bunting sales 5.0% Comparable Store Sales Growth 38.6% Gross Margin Up 151 bps 22.2% Online Sales as % of total sales Up 24.2% 72 Net Promoter Score (at the end of year) up 18.3% Private Label and Exclusive Products 45.3% of total sales Private label now at 8.2% of sales Exclusive products now at 37.1% of sales Refer to Section 2.5 of the Directors’ Report for further discussion on pro forma financial information and a reconciliation to statutory results. 6 Private label & exclusive products Exclusive Products % of sales Private Label products % of sales 41.4% 45.3% 8.2% 36.5% 6.8% 5.3% 27.6% 4.1% 20.9% 3.9% 17.0% 23.5% 31.2% 34.6% 37.1% FY18 FY19 FY20 FY21 FY22 Sales ($m) Sales ($m) Comp % $507.3 $468.4 Online sales ($m) Online sales ($m) % of total sales $112.7 $90.8 $405.2 $362.3 11.3% $304.5 8.7% $58.9 $42.3 New headless technology architecture deployed Supporting the Australian and New Zealand websites 4.9% 5.0% $28.9 19.4% 22.2% -0.2% 9.5% 11.8% 14.5% FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22 Gross profit ($m) Pro forma NPAT ($m) Gross profit ($m) Gross margin % $195.8 $173.7 Pro forma NPAT ($m) $29.6 $26.0 $146.9 $126.7 $100.9 35.0% 33.1% 36.2% 37.1% 38.6% $9.6 $19.3 $14.4 FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22 National Distribution Centre and Store Support Centre Successfully commissioned in 2H FY2021; fully operational for FY2022 New Zealand operations initiated Online sales to NZ parents commenced in July 2020. Local NZ website launched after the year end (in NZ$) with first store to open in Auckland in August 2022 Store network growth – now 66 stores • 4 new Australian stores opened during FY22 • 2 stores refurbished and 2 stores relocated • Australian network plan of over 110 stores • First New Zealand store opened in August 2022 • New Zealand network store plan of over 10 stores 7 Baby Bunting Annual Report 2022Chair and CEO’s report Melanie Wilson, Chair and Non-executive Director Matt Spencer, CEO and Managing Director 8 Dear Shareholder We are very pleased to present the 2022 Annual Report of Baby Bunting Group Limited. FY2022 was another year of growth, change and progress. With our purpose at the heart of what we do, we continued to focus on our people and our customers and continuing our investments in the business to execute on our growth strategy to support more families across Australia and New Zealand. FY2022 financial results The 2022 financial year had a number of challenges. The ongoing effects of COVID-19 continued to be felt with lockdowns occurring throughout Australia in the first half and with further ongoing effects on the community as COVID-19 cases increased in the second half. Managing our supply chain and inventory was made more challenging this year due to global and national events. Increasing inflation, interest rate rises and other challenges for consumers have all become more prominent as the year has progressed. Impacts on building materials and trades has also made the timing of new store developments more challenging. Against this background, we are pleased to report another year of growth for Baby Bunting. We have continued to grow sales and we have expanded our online and omnichannel offer. Strong results The team again delivered excellent growth as seen in our financial results for FY2022: • total sales were $507.3 million, up 8.3% on the prior year; • the total number of transactions were up 9.8% on the prior year; • online sales of $112.7 million (up 24.2%), representing 22.2% of total sales; • gross profit increased 12.7% on the prior period to $195.8 million and gross margin as a percentage of sales increased 151 basis points to 38.6%; • statutory net profit after tax was $19.5 million, up 14.6% on the prior year. On a pro forma basis, EBITDA was $50.5 million up 16.1% on the prior corresponding period and pro forma EBITDA margin increased 68 basis points to 10.0%. Pro forma NPAT was $29.6 million, up 13.6% on the prior corresponding period. A reconciliation between the statutory and pro forma financial results is set out in Section 2.5 on pages 40 to 41 of the Directors’ Report. Strong financial position and dividend Baby Bunting’s balance sheet is strong with minimal debt (net debt $0.7 million at year end) as our operating cash flows continue to fund our growth program. During the year, the Company renegotiated and extended its $70 million banking facility with NAB, with the facility now maturing in March 2025. Noting the Board’s target of paying dividends equivalent to approximately 70% of the Company’s pro forma NPAT, the Board has approved a final dividend of 9.0 cents per share fully franked. This takes the total dividend payment for the year to 15.6 cents per share. New Zealand: first store opened! We first started supporting parents in New Zealand through a dedicated New Zealand website in July 2020. In the first half, the New Zealand website transitioned to our new headless technology architecture. Since then, we have developed our strategy to support new and expectant parents in New Zealand. Ongoing COVID-19 restrictions affected our ability to open our first store during FY2022. We have overcome those challenges and have opened a local distribution centre and are very excited that our first store opened in Auckland in August 2022 with a further store to follow in Christchurch, as we work to build out a store network of over ten stores in New Zealand. Our plan is to build a New Zealand business, run by New Zealanders respecting the New Zealand culture. We are excited to bring our one stop baby shop to parents in New Zealand, all as part of our large destination format offer. We believe New Zealand parents will respond well to our offer as we also work with a range of new suppliers in New Zealand. Another year of challenges and growth The early part of the financial year saw lockdowns in place at various times around Australia, with New South Wales and then Victoria having extended lockdowns. Interstate and international travel was also curtailed. Border closures had impacts on cross-border sales (across regions), resulted in the need to manage our state-based teams remotely and presented challenges to new store openings. As the lockdowns and border restrictions eased, COVID-19 continued to affect the community through increased case numbers and isolation requirements which had an impact on business operations. COVID-19 also affected our normal measures of performance, with metrics like comparable store sales becoming a bit more volatile where prior or current periods were affected by lockdowns. There were some broader challenges during the year, with impacts on supply chains arising from international and local events (including adverse weather conditions) and a changing consumer economic outlook with increasing inflation and interest rates rises. Investments in transformational replenishment systems, our new larger Distribution Centre and strong relationships with our suppliers have enabled us to maintain a healthy stock position and strong product flow throughout the year. We were able to limit price increases and maintain value for our customers through leveraging efficiencies. These included our direct import program, managing international freight costs though a multi-carrier strategy, expanding our private label range, and transitioning further suppliers from direct-to-store fulfilment to fulfilment through our Distribution Centre. As unemployment reached record lows, team member recruitment became more intense with increased competition for talent. In the context of the above, we are extremely pleased at what the Baby Bunting team has achieved this year. 9 Baby Bunting Annual Report 2022 Chair and CEO’s report continued Our digital journey The trend of consumers shifting some of their purchases online featured prominently in the first half during what were essentially national COVID-19 lockdowns. Our strategic investments into our digital customer platforms continued to play a growing role in our omnichannel strategy, with some important progress made over the past year both for our online store and behind-the- scenes systems. Online sales of $112.7 million were up 24.2%, and now make up 22.2% of total sales (up from 19.4% in FY2021). The click & collect portion of our online sales were particularly strong growing 28.2% to be 10.4% of all sales (8.8% in FY2021). Our transition to a headless technology architecture hit a significant milestone, with the Australian website switching over to the new technology stack in January. This transition went extremely smoothly. We are already building on this new technology, integrating our loyalty program into our online experience and introducing online customer feedback opportunities to inform future enhancements for customer experience on these platforms. We also relaunched our gift registry service built on the new technology. The results have been pleasing and we continue to build out features to meet customer needs. Our click & collect experience has also been in focus this year, with the introduction of a new platform to enable both our team and our customers to manage the end-to- end collection journey more efficiently. This is currently in a pilot phase and will be rolled out to more stores over the coming months. Growing market share and supporting more parents across Australia We opened four additional stores in Australia during the year, relocated two existing stores to new locations within existing catchments and refurbished a further two stores. Our 65th Australian store opened in early August 2022 at Hornsby (NSW) and we have signed leases for a further 5 stores that will open in Australia in FY2023. We also completed our periodic review of our store network plan. In collaboration with third party demographers and taking into account changes in market share, customer spend patterns, population growth projections and our store economics, the Company is now looking to continue to grow its network of stores in Australia to over 110 stores (up from over 100 stores). 10 We will continue with our focus on opening stores in regional areas to support parents throughout Australia. During the year, we opened stores in Cairns, Wagga Wagga and Shepparton and, together with our other regional stores including at Albury, Ballarat, Bendigo, Coffs Harbour and Townsville, our regional store network is performing strongly, with exceptional market share penetration in these locations. Our long-term store network plan is predicated on the availability of suitable store locations that meet our rigorous return on investment hurdles. In assessing potential new stores, we consider site factors, the demographic profile or the target catchment, the likely market share and the estimated effect of any sales re-direction on existing Baby Bunting stores. As part of our omnichannel strategy, our expanding store network has become a critical part of our supply chain providing operational flexibility and improving our ability to fulfil online orders faster, more efficiently and where our customers need them. During the year, we had 48% of online orders fulfilled from stores. Our long term objective remains to fulfil 90% of online orders same day in metro areas. Our loyalty program - Baby Bunting family – now a multichannel offer During the year, we launched our new loyalty program, Baby Bunting family. We now have more than 1.4 million members and around 705,000 active members who have transacted with us in the period. Members of our Baby Bunting family earn rewards every time they shop with us and they can use their accumulated rewards to purchase further products they need. Around 81% of all purchases involve our loyalty members and our Net Promoter Score finished the year at a pleasing 72. Through our investment in loyalty, we aim to have a deeper understanding of our customers through more sophisticated data and insights. Our services offer FY2022 saw more than 137,000 car seats installed by our trained car seat installers, a growth of 5.7% on last year. With land transport accidents a leading cause of death in children in Australia, child restraint installation is critical in supporting parents to keep their little ones as safe as possible. We are committed to expanding our services business, so new and expectant parents can feel supported throughout their parenting journey. This year we have focused on expanding into the hire market for critical baby products, showcasing our car seat hire services as well as introducing breast pump hire. Lastly, we are also trialling other services based on our customers’ needs including nursery furniture assembly and car seat repairs. Our range of services leverages our growing store network and experienced team and complements our wide range of products sold in stores. Growing our private label and exclusive ranges To ensure that we can continually adhere to our value proposition and provide our customers with a wide range of products at everyday low prices, we have continued to invest in our exclusive and private label ranges. Our private label offer comprises three quality brands: 4baby, Bilbi and JENGO. Our 4baby range is our entry price point range and includes high chairs, travel cots, apparel and consumables. Bilbi is a mid-tier brand used for soft good products. The JENGO range reflects quality finishes and includes products such as prams, travel cots and rockers. Brands and offers exclusive to Baby Bunting have also grown over the year. When taken together with exclusive products, our private label and exclusive products represented 45.3% of all sales (up from 41.4% in the prior year). Our investments in our network of stores, range, price and services enable us to differentiate against pure-play online retailers. Sustainability: our People, our Community, our Planet We have made pleasing progress on our sustainability agenda. However, we recognise that there is still much more to do to continue to ensure we maximise our positive impact. Our second Sustainability Report, which is published at the same time as this Annual Report, explains the Board and management’s approach to sustainability. As a business, we have responsibilities to our team, our customers, and the broader communities in which we operate. We also have relationships and responsibilities with other stakeholders, including suppliers, regulators and industry bodies. Our Sustainability Strategy is based around three pillars: • our People – creating an equitable, inclusive and safe workplace where our team members can thrive. With a focus on being a parent friendly organisation. • our Communities – contribute to support the communities in which we operate and to focus on the needs of parents and families. • our Planet – operating in a sustainable manner to reduce the environmental impact of our actions. We are pleased with the progress we have made across these key areas of focus. Our 12-month rolling Lost Time Injury1 Frequency Rate finished the year at 8.44 (down from 9.98), we expanded team member training, our fundraising and charitable contributions were around $695,000 (up from $260,000) and consumption of green energy was around 11% for the year (up from 0% in the prior year) following the commencement of our green energy purchasing program in January 2022. Our scope 2 emissions reduced by 4% over FY2021 levels, at the time our store network added 4 more stores (and with the 4 stores added in FY2021 trading for a full year). You can read more about our goals and our progress on page 16 and in our 2022 Sustainability Report. Our commitment to product safety – our number 1 priority Aligned to our purpose, we are passionate about product safety and compliance. On page 18 of this Annual Report there is information about the product testing room we commissioned at our Store Support Centre during the year. In addition to being an important investment, there is an additional element of emotion for us associated with that testing room. We have named the room the Wen Huang Product Testing Room. Wen was our first Quality Assurance and Compliance Manager at Baby Bunting. Wen, who had spent many years working in the nursery goods industry, had a vision of Baby Bunting having its own well-equipped product testing room. With the move to our new Store Support Centre, we were able to invest in such a room. Devastatingly, Wen passed away before he could see his vision realised. We hope our investment is one small way to honour and remember Wen’s contribution to Baby Bunting and to the safety of all infants in Australia and New Zealand. 1. We define a Lost Time Injury to be any injury that results in a team member being unable to attend their next rostered shift. 11 Baby Bunting Annual Report 2022 Chair and CEO’s report continued Our team We acknowledge it every year because it continues to be true: our Team Members are the heart of our business, and without them, we could not do the incredible things we are doing. The dedication of our store teams to excellence in customer service and advice are what help set us apart, and their support for parents and caregivers in the early years of parenthood cannot be overlooked. We thank every Team Member for their dedication and everything they do to support new and expectant parents in the early years of parenthood. Our Distribution Centre team did a great job successfully transitioning to our new facilities, which had its first full year of operations. Our Store Support Centre team continued to adjust to new ways of working and worked hard to support all parts of the business and to deliver many of our transformation projects. During the year, we continued to invest in new people systems and new learning and development resources to continue to build the best team. With further investment to be made in the coming year with new payroll and time and attendance systems, we are aiming to have in place systems that support our ongoing growth and make life easier for our team. Board renewal Melanie Wilson was welcomed to the position of Chair of the Board in October 2021, following the retirement of Ian Cornell. Ian had led the Board successfully since 2016 through a great period of growth for the Company. In September 2021, the Board was strengthened when Francine Ereira and Stephen Roche joined the Board as Non-executive Directors. They are both experienced executives with significant retail and digital experience. The Board has now achieved its gender diversity target of having an equal number of female and male Non- executive Directors. Importantly, the Board has a mix of skills and experience appropriate for the ongoing growth of Baby Bunting. Exciting times ahead as we grow market share Baby Bunting’s strategy has remained consistent over a number of years and we have worked to execute on it and drive market share growth. We have been happy with the progress we have made to date and remain committed to the further growth of Baby Bunting. Our investment in online combined with our growing store network means we have a strong foundation for future growth. Our expansion into New Zealand will see us refine our international model which will enable us to support more parents and parents-to-be. We will continue to add new stores, as we head towards our store network plan of 110 stores throughout Australia. We are working to expand our product range and increasing the range of product available online. We have plans to broaden our total addressable market by opening up an Australia marketplace for baby products. The 2023 financial year will, no doubt, present external challenges for retailers. As an organisation that supports new and expectant parents, we will continue to embrace the opportunity to provide quality goods and services to parents at great value, every day. Centred on our core purpose and supported by a great and committed team and supplier partners, we are confident about Baby Bunting’s future. Thank you all for your continued support. Melanie Wilson Chair Matt Spencer CEO and Managing Director 12 Baby Bunting Annual Report 2022 13 Store network We have updated our Australian store network plan and are now working to have more than 110 stores in Australia 66 stores throughout Australia and New Zealand SA 4 WA 6 QLD 13 NSW 22 ACT 2 Store Support Centre/National Distribution Centre Dandenong South, Melbourne TAS 1 VIC 17 NZ 1 Albany (Auckland) store opens August 2022 For New Zealand, we have a network plan for more than 10 stores Distribution Centre Wiri, Auckland 14 New Zealand Kia ora! We’re excited to be opening stores in New Zealand to support New Zealand parents and parents-to-be. We have a New Zealand team and are working with New Zealand suppliers to provide a great range of products suitable for New Zealand families. Our first store will open at Albany, Auckland in August 2022. Our New Zealand website, babybunting.co.nz is now operational providing great offers to parents and gift givers in New Zealand. We have opened a distribution centre in Auckland that will support our growing store network as well as process online fulfilment. It’s a privilege to be able to live our core purpose in New Zealand to support new and expectant New Zealand parents. With plans for a store network of over 10 stores, we are looking forward to the years ahead! 15 Baby Bunting Annual Report 2022Sustainability We have now commenced phasing out the use of plastic shopping bags in stores and are moving to paper bags that are reusable and 100% recyclable We streamlined our paper catalogue printing processes and saved around 130.5 million pages of paper when compared with FY2021 Baby Bunting and sustainability Our ESG strategy is based around the following three pillars: • Our People – creating an equitable, inclusive and safe workplace where our team members can thrive. With a focus on being a parent friendly organisation. • Our Communities – contribute to support the communities in which we operate and to focus on the needs of parents and families. • Our Planet – operating in a sustainable manner to reduce the environmental impact of our actions. Our 2022 Sustainability Report describes in detail our goals and progress during FY2022. It is available at babybunting.com.au/investor 16 Our goals related to these pillars include: Goal 2022 achievement Safety: Our Lost Time Injury Frequency Rate to be below 7 by 2025 Gender equality: At least 50% women across all levels of Baby Bunting by 2030 Training: On average, every team member to complete at least 15 hours of training each year Share ownership: At least 65% of our team members to be shareholders by 2025 Helping parents who need support: To raise $10 million in the period 2021 to 2030 to assist parents in need We define a lost time injury to be any injury that results in a team member being unable to attend their next rostered shift. In FY2022, we achieved an LTIFR of 8.44 (an improvement from 9.98 in FY2021). • Women comprise 50% of the Non-executive Directors. • Women make up 25% of Senior Executives. • Women make up 76% of all Store Manager positions. • Women make up 58% of all Regional/Area Manager positions. During the year, a focus was on training for our leaders (and emerging leaders), with, on average: • Store Managers completing around 37 hours of training; • Area Managers completing around 60 hours of training; • Store Support Centre and Distribution Centre managers completing around 15 hours of training. During FY2022, on average each team member completed around 4 hours of formal training. Each year since our IPO in 2015, we have operated an employee share gift plan providing around $1,000 worth of Baby Bunting shares to eligible employees. Around 50% of our team members are shareholders and we want that number to grow. In FY2022, we contributed $695,000 to support the communities in which we work (up from $260,000 in FY2021). We raised $285,000 to support Life’s Little Treasures Foundation and a further $304,000 to support PANDA. We donated $50,000 to the Red Cross to support its flood relief program and provided around $55,000 of in-kind support that helped a number of parents in need and organisations that support them. Our cumulative total, over the last two years, is $955,000 – and we will be working hard to hit our long term goal. Energy: 100% renewable energy by 2031 for sites we control Our scope 2 emissions were 4% lower than FY2021 levels. This was achieved at the same time as our store network continued to grow in FY2022. During FY2022, around 11% of the electricity for the sites we control was purchased as green energy. Our program of purchasing green energy commenced in January 2022 and we expect to purchase around 25% of green energy for the sites we control in FY2023. In FY2023, we have plans to commence transitioning some of our stores to be powered predominantly by roof top solar, with our first store to be powered this way in 1H FY2023. Climate change action: Net zero scope 1 and 2 greenhouse gas emissions by 2050 We have commenced a process for consolidating our energy provider information to enable an efficient data collection and monitoring. This will give us better visibility on the sources of our carbon emissions, highlighting areas where we can have the most significant impact and set short and medium term goals. Product stewardship: Product stewardship schemes in place covering our hard goods category products by 2030 We have commenced sourcing green energy for the sites we control and have commenced on a program of exploring roof top solar installations. We have been working, along with other retailers and manufacturers, on a product stewardship scheme for children’s car seats, known as SeatCare. SeatCare will be an industry-led voluntary product stewardship scheme. Scheme design has progressed since October 2021 and our hope is that the scheme is established and operating during early 2023. In New Zealand, we will participate in the product stewardship scheme known as SeatSmart. Consumers will be able to return end-of-life car seats at stores for processing to ensure as much of the seat is diverted from landfill and into recycling as possible. 17 Baby Bunting Annual Report 2022 (Bastion Preferred) JUSTIN/ALEX/AND FAMILY _F2A6889.jpg _F2A6869.jpg _F2A6348.jpg The Wen Huang Product Testing Room We pride ourselves on our dedication to product safety and compliance, and we’ve recently celebrated a milestone. Our team officially commissioned our new Wen Huang Product Testing Room, which is a space dedicated to ensuring certain products we sell are safe for the little ones who will be using them. For our team members, there is an extra element of emotion tied to the commissioning of the testing room. Wen Huang, who this room was named after, was our very first Quality Assurance and Compliance Manager here at Baby Bunting. He was a leader in his field and passionate about his role, and he had an incredible vision: having our own well-equipped product testing room to enable us to test certain products thoroughly on-site at our Store Support Centre. Devastatingly, Wen passed away before he could see his vision realised. True to his dream, this testing room has specialised equipment that helps us to ensure parents can use products with confidence. This equipment includes a rolling road machine, a curb mounting test machine, an inclined stability testing machine and more, allowing us to thoroughly test baby products through a range of scenarios. We are honoured to remember Wen and his commitment to safety through the Wen Huang Product Testing Room. 18 (Bastion Preferred) JUSTIN/ALEX/AND FAMILY _F2A6889.jpg _F2A6869.jpg _F2A6348.jpg 19 Baby Bunting Annual Report 2022The board Details of the qualifications, experience and special responsibilities of each current director are as follows: Melanie Wilson Chair, Non-executive Director MBA, B.Comm (Hons), GAICD Member of the Remuneration and Nomination Committee Melanie has over 15 years’ retail experience in senior management roles. Her appointments have 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 executive 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 holds a Bachelor of Commerce (Hons) has a Master of Business Administration (Harvard). She is a graduate of the Australian Institute of Company Directors. She is currently a non-executive director of EML Payments Limited (appointed in February 2018), JB Hi-Fi Limited (appointed in June 2020) and PropertyGuru Group Ltd (a NYSE listed entity) (appointed November 2019). She was a non-executive director of Shaver Shop Group Limited (June 2016 to May 2020) and iSelect Limited (April 2016 to October 2021). Matt Spencer CEO and Managing Director B.Bus 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. Gary Levin Non-executive Director B.Comm, LLB, MAICD Chair of the Audit and Risk Committee Gary has over 40 years’ management, executive and non-executive experience in public and private companies including in the retail, investment and online industries. As a founder, Gary has built and grown many successful retail businesses, and as a non- executive director he has been closely involved in the transformation and growth of retail and digital businesses. These businesses include Rabbit Photo (former joint managing director), JB Hi-Fi (former non-executive director), Catch Group (former Chair), Cheap as Chips (a discount variety retailer) (current Chair), Mwave Australia (an e-commerce computer retailer) (current Chair) as well as his role at Baby Bunting since 2015. 20 Donna Player Non-executive Director BA, GAICD Member of the Remuneration and Nomination Committee Donna has over 35 years’ experience in retail, marketing and product development gained in both retail and wholesale industries. Currently she is Director of Merchandise for Camilla Australia. In the four years to May 2016, Donna was the Group Executive of Merchandise for Fashion, Beauty, Footwear, Accessories and Home for David Jones. Prior to her role at David Jones, Donna was General Manager, Merchandise and Planning for BIG W. During her career, Donna has had executive responsibilities for merchandise, planning, branding, sourcing and supplier strategies. Donna holds a Bachelor of Arts from the University of NSW and is a graduate of the Australian Institute of Company Directors. She is currently a non-executive director of Accent Group Limited (appointed in November 2017). She is also a non-executive director of MYSALE group plc and the Children’s Tumour Foundation. Gary Kent Non-executive Director BEc, GAICD Chair of the Remuneration and Nomination Committee, Member of the Audit and Risk Committee Gary has an extensive background in the retail and services sector, with considerable experience in corporate finance transactions. He had a career of 18 years with Coles Myer and the Coles Group, during which time his roles included Chief Financial Officer of the Coles Group and Group General Manager for Finance at Kmart and Myer. Gary has served as the Chief Executive Officer of the Western Bulldogs AFL club, where he has also served as a non-executive director and as chair of the club’s audit and risk committee. He is a non-executive director of Blooms The Chemist Management Services Limited. Gary holds an economics degree, is a chartered accountant and a graduate of the Harvard advanced management program. Francine Ereira Non-executive Director B.Bus, GAICD Member of the Remuneration and Nomination Committee Most recently Country Head Australia and New Zealand at Klarna, a leading global payments and shopping service, Francine brings over 20 years’ experience in areas including e-commerce, payments/fintech, sales, supply chain and marketing. Prior to her role at Klarna, she was General Manager Sales & Solution Delivery at Zip Co Limited, a leading Australian payments solutions provider. Her roles have also included senior executive roles in e-commerce logistics and fulfilment, and sales and marketing roles at national and international consumer brand companies. Francine holds a Bachelor of Business from Monash University and is a graduate of the Australian Institute of Company Directors. Stephen Roche Non-executive Director B.Bus, FAICD Member of the Audit and Risk Committee Stephen has over 15 years’ experience as a director of public companies, private family offices and not for profit enterprises. Most recently he was Managing Director of Bridgestone Australia & New Zealand. He has also been Managing Director and CEO of Australian Pharmaceutical Industries Limited from August 2006 to February 2017. He brings extensive experience in strategy, business development and supply chains across retail, healthcare and consumer markets. Stephen is currently a non-executive director of Blackmores Limited (appointed in September 2021), Myer Family Investments Pty Ltd and a director of the Adelaide Football Club. He holds a Bachelor of Business from the University of South Australia and is a fellow of the Australian Institute of Company Directors. 21 Baby Bunting Annual Report 202222 Corporate governance statement This Corporate Governance Statement describes the corporate governance practices of Baby Bunting Group Limited (Baby Bunting or the Company) for the financial year ended 26 June 2022 and it is current as at that date. This Statement has been approved by the Board. This Statement reports the Company’s compliance with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (4th edition) (ASX Principles and Recommendations). Copies of a number of the charters and policies referred to in this Statement are available under the “Governance” section of the Company’s corporate website babybunting.com.au/investor Developments during FY2022 During the 2022 financial year, the composition of the Company’s Board changed. Ian Cornell retired as a Non-executive Director at the Company’s October 2021 AGM and Melanie Wilson became the Chair. In September 2021, Francine Ereira and Stephen Roche become Non-executive Directors and each was elected at the Company’s 2021 AGM. Following these appointments, the composition of the Board Committees was also adjusted. The Company reviewed and updated its Delegation of Authority Policy, and its Securities Trading Policy. Information about the changes is included in this Statement. PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT Baby Bunting’s corporate governance framework can be illustrated in the chart below. Further details of the governance elements included in the chart are described further in this Statement. The Company’s Constitution sets out the rights of shareholders and the manner in which Directors are to be elected and how the company is to be governed. Shareholders The Board The Board Charter sets out those matters that are reserved to the Board and the manner in which the Board is to operate. Expected standards of behaviour and processes to ensure appropriate conduct are set out in policies such as the Securities Trading Continuous Disclosure, Anti-Bribery and Corruption, Whistleblower and Code of Conduct. Audit & Risk Committee Responsibilities include assisting the Board in respect of risk management, financial and corporate reporting and external audit. Remuneration & Nomination Committee Responsibilities include assisting the Board with remuneration policies and practices, advice on the composition of the Board (including deserved skills) and succession planning. Committee Charters set out the matters delegated by the Board to the Committee and how they are to function. CEO and Managing Director Executive Leadership Team Baby Bunting Team Members Delegation of Authority Policy set out the matters delegated to management (and in which authority is to be exercised). 23 Baby Bunting Annual Report 2022Corporate governance statement continued Written appointments The Company has entered into written agreements with each of its Directors and senior executives setting out the terms of their appointment. The material terms of all employment, service or consultancy agreements with Directors or other related parties have been disclosed, to the extent required, in accordance with ASX Listing Rule 3.16.4. The Company’s Remuneration Report contains additional details on the remuneration of each Non-executive Director and summaries of the employment contracts of each other member of the Company’s key management personnel. Role of the Company Secretary Corey Lewis is the Group Legal Counsel and Company Secretary. As part of his role as company secretary, he is responsible for day to day operations of company secretarial matters, including the administration of Board and committee meetings, overseeing the Company’s relationship with its share registrar and lodgments with the ASX and other regulators. The company secretary is accountable to the Board, through the Chair, on all matters to do with the proper functioning of the Board. Darin Hoekman, the Chief Financial Officer, is also a company secretary of the Company. He has responsibility for the above matters in the absence of the Group Legal Counsel and Company Secretary. Diversity The Board has adopted a Diversity Policy which sets out Baby Bunting’s commitment to recognising the importance of diversity for its business. The policy is available on Baby Bunting’s corporate website (babybunting.com.au/investor). Baby Bunting actively promotes diversity through its hiring and promotion practices, measures gender diversity in the composition of its senior executives and team members generally, and reports these annually to the Australian Government’s Workplace Gender Equality Agency. Responsibilities of the Board and management The Board has adopted a written charter to provide a framework for the effective operation of the Board, which sets out: • the Board’s composition, its role and responsibilities, including that the Board is responsible for approving and monitoring the Company’s strategy, business performance objectives, financial performance objectives, and overseeing and monitoring the establishment of systems of risk management and internal controls; • the roles and responsibilities of the Chair and the Company Secretary; • the division of authority between the Board, the CEO and Managing Director and management; • the ability of Directors to seek independent advice; and • the process for periodic performance evaluations of the Board, each Director and Board committees. Delegation of Authority Policy The Company’s Delegation of Authority Policy sets out in detail the authority that has been delegated to the CEO and Managing Director and other executives and Team Members. The policy has been reviewed during the year having regard to the growth of the Company since it was initially adopted. While the Board is responsible for approving the annual budget prepared by management, executives are delegated responsibility for the budgets that apply to their functions and departments. The Delegation of Authority Policy also specifies the processes for review and approval of contracts and other commitments. Director and senior executive appointments – conducting appropriate checks Potential new directors are subject to appropriate screening and background checks prior, including police checks, prior to appointment as a director by the Board. In addition, the Company provides shareholders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a Director. When appointing senior executives, screening, background checks and police checks are undertaken. 24 As at 26 June 2022, the proportion of women employed by Baby Bunting was: Directors Senior Executives 43% 57% 25% 75% Female Male Female Male Regional & Area Managers All Team Members 327 58% 42% 1,209 Female Male Female Male Note: Senior Executives defined as the CEO and Managing Director and those executives who report to the CEO and Managing Director, plus the GM Merchandise, GM Store Operations, GM Supply Chain, GM Digital and GM IT and Transformation Program. The Board has set the following gender diversity objectives: Reference group Gender diversity objective FY22 outcome Board of directors That the Board comprise an equal number of women and men as Non- executive Directors and that the Board (including any executive directors) comprise at least 40% of each gender Objective met During the year, the mix of Non-executive Directors moved to be three women and three men. Currently, the Board (including the executive director) comprises 43% women (three out of seven in total). Senior Executives That at least a third of the Company’s Senior Executives are women in the medium term Objective not met Currently, 25% of Senior Executives are women. Executive succession planning has regard to, among other things, achieving this objective in the medium term. Area and Regional Managers That 50% of the Company’s Area Managers and Regional Managers be women Objective met 58% of Regional and Area Managers are women. 25 Baby Bunting Annual Report 2022Corporate governance continued The table below shows the level of gender diversity in the Company and the changes from the prior year: Number of females in category at 26 June 2022 Total number in category at 26 June 2022 % of females Number of females in category at 27 June 2021 Total number in category at 27 June 2021 % of females 3 3 58 7 43% 12 25% 79 73% 2 3 50 6 12 33% 25% 70 71% Board of directors (incl. CEO & MD) Senior Executives (incl. CEO & MD) Area, Regional and Store Managers All Team Members 1,209 1,536 79% 1,082 1,383 78% In June 2022, the Company lodged its Workforce Profile report with the Workplace Gender Equality Agency (WGEA). Board performance evaluation The Remuneration and Nomination Committee Charter provides that the Remuneration and Nomination Committee will assist the Board to assess Board performance, and the performance of Board committees and individual Directors. The Board assessed its own performance, and considered the performance of the Board committees and individual Directors. The performance reviews were undertaken by way of questionnaires as well as discussions on how the Board and each committee’s processes could be improved or modified. The Board also sought the views of executives by way of an anonymous survey to seek additional perspectives on the Board and Committee processes and interactions between the Board and management. Senior executive performance evaluation The Remuneration and Nomination Committee Charter provides that the Committee will oversee the processes for the performance evaluation of the executives reporting to the CEO and Managing Director and review the results of that performance evaluation process. The Board is responsible for reviewing the performance of the CEO and Managing Director. In relation to the performance of senior executives, after the end of the reporting period, the Remuneration and Nomination Committee received reports of the outcome of the executive performance evaluation processes. These were subsequently considered by the Board. The executive evaluation processes involved, among other things, assessing the performance of executives against their specific performance objectives as well as the Company’s overall performance on a range of measures (including financial and specific key performance indicators). For the performance assessment of the CEO and Managing Director, the Board considered the CEO and Managing Director’s performance for the year having regard to, among other things, his specific performance objectives and the Company’s performance. The Chair was responsible for engaging with the CEO and Managing Director in relation to the Board’s assessment of his performance. 26 • the specific responsibilities of the Committee in respect of the areas of nomination (including in respect of matters going to the composition of the Board, the Board’s skills matrix and succession planning for the Board) and remuneration (including responsibilities to review and make recommendations to the Board on executive and Non-executive Director remuneration, reviewing the Company’s remuneration policies, overseeing employee equity incentive plans and responsibility for reviewing the Company’s remuneration report). Board skills matrix The Board, having regard to the current size of the Company and its current strategies, has adopted a skills matrix setting out the mix of skills and diversity that the Board is looking to achieve in its membership at this time. The Board also has regard to the attributes and personal qualities of Directors, including the ability of individual Directors to contribute effectively to the functioning of the Board and a commitment to the Company’s values and its Code of Conduct. For persons being considered for appointment to the Board, the Board will seek to identify whether the person has a demonstrated or assessed ability to work in a collegiate environment along with the ability, where necessary, to express a dissenting view objectively and constructively. The Board considers that each Non-executive Director possesses these attributes. Given the Company’s size, the Board considers that the Board should be comprised of five to seven Non- executive Directors. PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE Nomination – Remuneration and Nomination Committee The Board has established the Remuneration and Nomination Committee. Its role is to review and make recommendations to the Board on remuneration policies and practices related to the Directors and senior management and to ensure that the remuneration policies and practices are consistent with the strategic goals of the Board. Before October 2021, the composition of the Committee was Melanie Wilson (Chair), Donna Player and Ian Cornell. Following the retirement of Ian Cornell as a Non-executive Director, the composition of the Committee was reviewed and the Committee now comprises the following Non- executive Directors: Position Chair Members Director Gary Kent Melanie Wilson Donna Player Francine Ereira Details of the qualifications and experience of Committee members are set out on pages 20 and 21. The number of meetings of the Committee and attendances by members during the reporting period are set out on page 51 of the Directors’ Report. Directors who are not members of the Committee may attend any meeting. The Remuneration and Nomination Committee Charter sets out: • the composition of the Committee, including that the Committee must comprise only Non-executive Directors, a majority of whom are independent and that the Chair of the Committee is not to be the Chair of the Board; • the Committee’s ability to have access to Company records and employees and the external auditor for the purpose of carrying out its responsibilities. The Charter also provides that the Committee may seek the advice of independent advisors on any matter relating to the duties or responsibilities of the Committee; and 27 Baby Bunting Annual Report 2022 Corporate governance statement continued Board skills matrix Skill or experience Description s l l i k s l i a c n h c e T Executive leadership Demonstrated success at CEO or senior executive level in a major business Commercial and financial acumen Demonstrated success in sustainably managing the financial performance of a large retail business or commercial undertaking People and organisational culture Experience with managing people and teams, including the ability to appoint and evaluate senior executives, manage talent development and oversee organisational change Information Technology Knowledge and experience in the use and governance of information technology and applications in a retail environment Risk management and compliance Experience in risk management and compliance frameworks and related policies and processes, setting risk appetites, identifying and providing oversight of material business risks Retail Experience at a customer/retail business obtained through an executive or leadership position Supply Chain Knowledge and experience in retail logistics and distribution Consumer advocacy Recent consumer experience in the retail baby goods sector (eg, as a parent or grandparent to small children) with an ability to bring the perspectives of parents or grandparents to deliberations (being among some of the Company’s most important stakeholders) Digital and technology Current experience with digital and online retailing, including a familiarity with changes in technology, applications and changing consumer habits ASX board experience and investor advocacy Experience as a non-executive director of an ASX listed company, including an ability to articulate the expected views of all categories of investors International experience Experience in international markets, exposed to a range of political, cultural, regulatory and business environments ESG and corporate social responsibility i e c n e r e p x E Experience in formulating, implementing and/or overseeing corporate governance and strategies focused on conducting business responsibly and ethically, enhancing corporate culture and generating long-term sustainable value for shareholders, employees, stakeholders and the community The Board intends to review the skills matrix annually to ensure that it remains appropriate for the Company, its circumstances and its strategies. 28 Independent Directors At the date of this Statement, the Board comprises seven directors. A majority of the Board are independent Non- executive Directors. Name Position Independent Directors Appointed Approximate length of service Melanie Wilson Chair, Independent Non-executive Director 15 February 2016 6 years 6 months Gary Levin Independent Non-executive Director 25 August 2014 8 years Donna Player Independent Non-executive Director 16 January 2017 5 years 7 months Gary Kent Independent Non-executive Director 12 December 2018 3 years 8 months Francine Ereira Independent Non-executive Director 1 September 2021 11 months Stephen Roche Independent Non-executive Director 1 September 2021 11 months Executive Director Matt Spencer CEO and Managing Director 23 April 2012 10 years 4 months Director Independence Director Tenure Diversity 14% 86% 14% 29% 28% 29% Independent Non-Independent 0-3 years 4-6 years 7-9 years 10-12 years 29 Baby Bunting Annual Report 2022 Corporate governance statement continued The Board considers an independent Director to be a Non-executive Director who is free of any interest, position, association or relationship that might influence, or reasonably be perceived to influence, in a material respect, his or her capacity to bring an independent judgement to bear on issues before the Board and to act in the best interests of the Company. The materiality of the interest, position, association or relationship will be assessed to determine whether it might interfere, or might reasonably be seen to interfere, with the Director’s characterisation as an independent Director. The Board has assessed each Non-executive Director to be independent. In assessing independence, the Board has had regard to the factors set out in the ASX Principles and Recommendations. For FY2023, each Director has confirmed that they anticipate being available to perform their duties as a Non-executive Director or executive Director without constraint from other commitments. Director induction and training The Board Charter contemplates that new Directors will be provided with an induction program to assist them in becoming familiar with the Company, its managers and its business following their appointment. The induction program involves, among other things, meetings with members of the Board and executive briefings on the Company’s operations and relevant business matters. Directors may, with the approval of the Chair, undertake appropriate professional development opportunities (at the expense of the Company) to maintain their skills and knowledge needed to perform their role. The Board and executives have adopted processes to ensure that the Board is briefed on developments relevant to the Company and the markets in which it operates. PRINCIPLE 3: INSTILL A CULTURE OF ACTING LAWFULLY, ETHICALLY AND RESPONSIBLY Baby Bunting’s values Baby Bunting’s vision is to be the most loved baby retailer for every family, everywhere. The Company sees its core purpose as supporting new and expectant parents in the early years of parenthood. The Board has endorsed the following set of values developed for Baby Bunting: Our Values Being passionate Be passionate about providing our customers with great products and services, advice and value every day Being considerate Be considerate and respectful of others and think about how our decisions and actions impact others Being honest Act with integrity and use good judgement Being positive Be positive and enjoy doing the things that contribute to a great team spirit Being focused Think big, but get on with doing the small things that make a big difference Being bold Never be afraid to evolve – encourage a culture of adventure and creativity Our Vision To be the most loved baby retailer for every family, everywhere. Our Core Purpose To support new and expectant parents in the early years of parenthood. 30 Code of Conduct The Board has approved the adoption by the Company of a formal Code of Conduct which outlines how Baby Bunting expects its employees to behave and conduct business in the workplace. The Code of Conduct applies to all employees, regardless of employment status or work location. In addition, the Directors, in the Board Charter, have committed to abiding by the Code of Conduct as it applies to the Board. The Code of Conduct is designed to: • provide a benchmark for ethical and professional behaviour throughout Baby Bunting; • promote a healthy, respectful and positive workplace and environment for all Team Members; • ensure that there is compliance with laws, regulations, policies and procedures relevant to Baby Bunting’s operations, including workplace health and safety, privacy, fair trading and conflicts of interest; • ensure that there is an appropriate mechanism for Team Members to report conduct which breaches the Code of Conduct; and • ensure that Team Members are aware of the consequences they face if they breach the Code of Conduct. The Code of Conduct is available on Baby Bunting’s corporate website (babybunting.com.au/investor). Whistleblower Protection Policy The Company has adopted a Whistleblower Protection Policy. A copy of the policy is available on Baby Bunting’s corporate website (babybunting.com.au/investor). The Group Legal Counsel has been appointed the Whistleblower Investigations Officer and the General Manager People & Culture has been appointed the Whistleblower Protection Officer, for the purposes of the Policy. When they arise, the Board is informed of all whistleblower reports in a manner consistent with the confidentiality and security requirements of the Policy. No such matters were reported in the financial year. Anti-Bribery and Corruption Policy The Company has adopted an Anti-Bribery and Corruption Policy. A copy of the policy is available on Baby Bunting’s corporate website (babybunting.com.au/investor). To support the Policy, the Company has adopted Acceptable Monetary Limits and Reporting Requirements which set out when an instance of a gift, entertainment or hospitality may be accepted by Baby Bunting Team Members. Generally, they must relate to general relationship building activities where it cannot reasonably be construed as an attempt to improperly influence the performance of the role or function of the recipient. Team Members must report instances of gifts, entertainment or hospitality other than where the value is immaterial. Where the estimated value exceeds specified limits, prior approval must be sought and obtained. The Board must be informed of material breaches of the Anti-Bribery and Corruption Policy. No such incidents or breaches were reported in the financial year. PRINCIPLE 4: SAFEGUARD THE INTEGRITY OF CORPORATE REPORTING Audit and Risk Committee The Board has established the Audit and Risk Committee. Its role is to assist the Board in fulfilling its responsibilities for corporate governance and oversight of the Company’s financial and corporate reporting, risk management and compliance structures and external audit functions. Before October 2021, the Committee comprised Gary Levin, Gary Kent and Melanie Wilson. The composition of the Committee was reviewed during the year and the Committee now comprises the following Non-executive Directors: Position Chair Members Director Gary Levin Gary Kent Stephen Roche 31 Baby Bunting Annual Report 2022 Corporate governance statement continued Details of the qualifications and experience of Committee members are set out on pages 20 and 21. The number of meetings of the Committee and attendances by members during the reporting period are set out on page 51 of the Directors’ Report. Directors who are not members of the Committee may attend Committee meetings. Corporate reporting In addition to the CEO and CFO Declarations (described above), the Company has processes that seek to ensure that its annual reports, half yearly reports and other reports prepared for the benefit of investors are not misleading or deceptive and do not omit material information. These processes include: The Audit and Risk Committee Charter sets out: • the composition of the Committee, including that the Committee must comprise only Non-executive Directors, a majority of whom are independent and that the Chair of the Committee is not to be the Chair of the Board; • the Committee’s ability to have access to Company records and employees and the external auditor for the purpose of carrying out its responsibilities. The Charter also provides that the Committee may seek the advice of independent advisors on any matter relating to the duties or responsibilities of the Committee; and • the specific responsibilities of the Committee in respect of the areas of risk management and compliance, financial and corporate reporting and external audit matters. With respect to external audit matters, the Committee has responsibility for developing and overseeing implementation of the Company’s policy on the engagement of the external auditor to supply non-audit services (noting that the Committee is required to advise the Board as to whether it is satisfied that the provision of any non- audit services is compatible with the general standard of independence for auditors). CEO and CFO Declarations The Board, before it approved the Company’s financial statements for the half year ended 26 December 2021 and the full year ended 26 June 2022, received from the CEO and Managing Director and the Chief Financial Officer a declaration. The declaration was, in their opinion, that the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively in all material respects. • a process of confirming pro forma non-statutory numbers against appropriate supporting files, along with review and verification by the appropriate individuals; • verifying key statements against appropriate source material; and • allocating relevant parts of the report or document for review and sign-off to an appropriate approver. PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE The Company has adopted a Continuous Disclosure Policy. The Continuous Disclosure Policy establishes procedures to ensure the Company complies with its continuous disclosure obligations under the Corporations Act 2001 and the ASX Listing Rules. The Board receives copies of all material market announcements promptly after they have been lodged with ASX. In addition, a copy of any new and substantive investor or analyst presentation is released to ASX in advance of the presentation. PRINCIPLE 6: RESPECT THE RIGHTS OF SECURITY HOLDERS The Company’s website The Company’s corporate website (babybunting.com.au/ investor) has information about the Company and its governance. Investor relations program The Board’s aim is to ensure that shareholders are provided with sufficient information to assess the performance of the Company and that they are informed of all major developments affecting the affairs of the Company. The Company is required by law to communicate to shareholders through the lodgement of all relevant financial and other information with ASX and, in some instances, mailing information to shareholders. Information (including information released to ASX) is published on the 32 Company’s website. The Company’s website also contains information about it, including key policies and the charters of the Board committees. In addition, from time to time, the Company conducts ad-hoc briefings with institutional investors, as well as financial media. In some instances, that can involve site visits to stores or the Company’s Distribution Centre. It is the Company’s policy not to hold briefings with investors or analysts from 1 June until the release of the full year results in August and from 1 December until the release of the half year results in February. Shareholder participation at meetings The Company’s annual general meeting for the financial year ended 26 June 2022 will be held on 11 October 2022. In previous years, the annual general meeting has been held in either Melbourne or Sydney. Last year, the annual general meeting was held virtually due to COVID-19 public health restrictions. Shareholders are provided with notice of the meeting (either electronically or by hard copy) in advance of the scheduled meeting time. Shareholders have an opportunity to ask questions at the meeting. In addition, shareholders can submit questions electronically in advance of a meeting via the share registrar’s website. It is the Company’s practice that all voting on substantive resolutions at shareholder meetings is conducted by way of a poll. Electronic shareholder communications The Company encourages shareholders to receive communications from it and its share registrar electronically and provides details for shareholders to send electronic communications and to have them actioned appropriately. PRINCIPLE 7: RECOGNISE AND MANAGE RISK Risk – Audit and Risk Committee The role of the Audit and Risk Committee is to assist the Board in fulfilling its responsibilities for corporate governance and overseeing the Company’s financial reporting, internal control structure, risk management systems and internal and external audit functions. This includes considering the quality and reliability of the financial information prepared by the Company, working with the external auditor on behalf of the Board and reviewing non-audit services provided by the external auditor to confirm they are consistent with maintaining external audit independence. The Audit and Risk Committee provides advice to the Board and reports on the status and management of the risks to the Company. The purpose of the Committee’s risk management process is to assist the Board in relation to risk management policies, procedures and systems and ensure that risks are identified, assessed and appropriately managed. Details of the Committee are contained on page 31 above (see “Audit and Risk Committee”) and details of the meetings of the Committee and the attendance of members are set out on page 51 of the Directors’ Report. Risk management framework The Board is responsible for overseeing the establishment of and approving risk management strategies, policies, procedures and systems of the Company, and is supported in this area by the Audit and Risk Committee. The Company’s management is responsible for establishing the Company’s risk management framework. The objectives of the risk management framework include: • identifying the key risks associated with Baby Bunting’s business; • raising the profile of risk within Baby Bunting and helping to embed a risk-aware culture within Baby Bunting; • assisting management and the Board to ensure that the Company has a sound risk management framework; • supporting the declarations by the CEO and Managing Director and the Chief Financial Officer that their opinions on the Company’s financial statements are based on a “sound system of risk management and internal control which is operating effectively”; and • where appropriate, having controls, policies and procedures to manage certain specific business risks – e.g an insurance program, regular financial budgeting and reporting, business plans, strategic plans, etc – so as to mitigate the likelihood, or consequence, of certain specific business risks. 33 Baby Bunting Annual Report 2022 Corporate governance statement continued As part of the risk management framework, processes exist to identify, assess, monitor and review the Company’s key risks and to document and monitor the Company’s other risks. In connection with its responsibilities for risk management, the Audit and Risk Committee receives reports from management on the risk management system, key risks and the related risk treatment plans as well as information on critical events that may arise throughout the year. Risk appetite statement The Board has adopted a Risk Appetite Statement. The statement provides guidance as to the type and degree of risk that the Board is willing to accept in pursuing the Company’s strategy and conducting its business. Risk appetite is the amount of risk that Baby Bunting is willing to accept or retain to pursue its strategy and conduct its business. It seeks to balance the benefits of an activity or new opportunity with the risk that the activity or opportunity might bring. The Risk Appetite Statement identifies a number of risk types (eg operational risk, people and culture risk, financial risk, legal and compliance risk, strategic risk) and states a risk appetite rating or tolerance for each. Risk appetite ratings range from zero appetite through to high appetite. Instances where a risk tolerance has been exceeded must be reported to the Audit and Risk Committee or Board, along with details of any proposed corrective actions. The statement forms parts of the Company’s risk management framework. Internal audit function The Company does not have a formalised internal audit function, but has processes for evaluating and continually improving the effectiveness of risk management and internal financial control processes. To evaluate and continually improve the effectiveness of the Company’s risk management and internal control processes, the Board relies on ongoing reporting and discussion of the management of material business risks. These processes are implemented, overseen and assessed by the management team, the Chief Financial Officer and CEO and Managing Director, and the Audit and Risk Committee. The Company has plans for a program of targeted reviews of specific activities (eg accounts payable, payroll, delegations, etc). The reviews will be conducted by an external assurance firm (not the external auditor) with the results reported to the Audit and Risk Committee. Environmental and social sustainability risks The Company is exposed to a number of risks, details of which are included in the Directors’ Report on pages 46 to 49. These risks could have a material impact on the Company, its strategies and future financial performance. These risks were identified as part of the Company’s risk management framework (described above). Management is responsible for developing strategies to manage identified risks. As a retailer, the Company is exposed to environmental and social risks, including risks relating to supply chains, sustainable packaging and sustainable product development and sustainable operating practices. Further details about Baby Bunting’s approach to environmental and social sustainability matters are contained in its Sustainability Report (released in August 2022). The Company has also published its second Modern Slavery Statement. The statement describes the modern slavery risks that exist in the Company’s supply chains. A copy of the statement is available on the Company’s website (babybunting.com.au/investor). PRINCIPLE 8: REMUNERATION FAIRLY AND RESPONSIBLY Remuneration – Remuneration and Nomination Committee The Board has established the Remuneration and Nomination Committee with specific responsibility for remuneration matters. Details of the Committee are contained on page 27 above (see “Nomination – Remuneration and Nomination Committee”) and details of the meetings of the Committee and attendances by members during the reporting period are set out on page 51 of the Directors’ Report. Directors who are not members of the Committee may attend Committee meetings. 34 EVELYN/SHAGGY/ISHA/GRANDPARENTS _F2A2804.jpg _F2A2846.jpg Remuneration for Non-executive Directors and Executives The Company’s Remuneration Report, included as part of its Directors’ Report, describes the Company’s remuneration policies and practices as well as providing details for each Director and those executives considered to be members of the Company’s key management personnel. JEAN/BILL/MAGGIE Non-executive Directors are not entitled to participate in the Company’s short term or long term incentive plans. Securities Trading Policy and hedging The Company’s Securities Trading Policy provides that persons subject to that policy (including Directors and executives) must not engage in transactions designed to hedge their exposure to the Company’s shares. In addition, designated persons must only trade during designated trading windows and must seek approval under the Policy before doing so. In May 2022, the Board reviewed the Securities Trading Policy and an updated version was approved. The key changes were to provide that the Chair of the Board must seek the approval of the Chairs of the Remuneration and Nomination Committee and the Audit and Risk Committee before trading and that directors or executives placing orders to trade in securities must take steps to advise their broker of the duration of any trading clearance and the applicable trading windows. _F2A0995.jpg _F2A0853.jpg 35 Baby Bunting Annual Report 2022Directors’ report 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 2022. 1. Principal activities During the financial period, the principal activity of the Company and its consolidated entities was the operation of Baby Bunting retail stores and its online store babybunting.com.au. Baby Bunting is Australia’s largest specialty retailer of maternity and baby goods, primarily catering to parents with children from newborn to three years of age and parents-to-be. Baby Bunting’s core purpose is to support new and expectant parents in the early years of parenthood. The Company also operates an online store, babybunting.co.nz, for customers in New Zealand. After the end of the financial year, the Company expects to commence store operations in New Zealand. The Company’s principal product categories include prams, cots and nursery furniture, car safety, toys, babywear, feeding, nappies, manchester and associated accessories. Baby Bunting also provides services that are complementary to the products it sells, including car seat installation and hire services of car seats and other products. 2. Operating financial review 2.1. The Company’s business model The Company’s business model centres around the sale of baby goods through its store network and digital channel, as well as product services offered to parents and parents-to-be. Products sold by Baby Bunting include third-party produced and branded baby goods (many of which are sold exclusively by Baby Bunting) and private label products. Baby Bunting’s private label products include products sold under the 4baby, Bilbi and JENGO brands. Exclusive products are products sourced by the Company for sale on an exclusive basis (so that those products can only be purchased from Baby Bunting). Historically, exclusive supply arrangements have been arranged with suppliers in relation to selected products and for varying lengths of time. Baby product services is an expanding part of Baby Bunting’s business model. The Company offers car seat installation services at all of its stores throughout Australia. A car seat hire service is also available at selected stores around Australia. The Company commenced sales of product online to New Zealand customers in July 2020. The Company has plans to establish a store network in New Zealand and the first store is expected to open in August 2022. Baby Bunting’s business model leverages several core competitive advantages, as summarised in the table below. Drivers of competitive advantage Comment Scale Convenient network of stores and a leading digital channel Baby Bunting is the largest specialty retailer in the Australian baby goods market and the only specialty maternity and baby goods retailer with a national presence in Australia. 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 65 stores across Australia. The Company’s website, babybunting.com.au, continues to be Australia’s leading specialty baby goods website as measured by number of visits. The Company is focused on delivering customers the best possible retail experience across all channels, in store, online or on mobile. 36 Drivers of competitive advantage Comment Customer centric team culture Baby Bunting has a dedicated team of well trained and knowledgeable staff to service Consistent retail format Widest product offering, in-stock and available Competitively priced Comprehensive range of ancillary services Cost effective marketing customers’ individual needs. We collect feedback from customers instore and online. Feedback is also tracked via Net Promoter Score, which was 72 at the end of the year. Insights gained from customer feedback and preferences are enabling Baby Bunting to tailor its offering to focus on the steps in the customer journey of first time parents as well as parents with growing families. Baby Bunting is focused on providing customers with a consistent retail experience across its network. The Company’s stores in major market catchments (with populations greater than 200,000) 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. Baby Bunting has a number of stores located in shopping centres, where the format incorporates the key elements of the standard destination store format. In regional centres (with populations of less than 200,000), the Company typically operates a smaller store format of approximately 1,200 to 1,500 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 our destination stores and all stores have parcel pick-up facilities allowing for easy loading of bulky items into customers’ vehicles as well as enabling car seat installation services. Baby Bunting offers what it believes to be the widest range of products, with over 7,000 products available. Through its Australian store network and approximately 22,000 square metre Distribution Centre and through the use of interstate third party warehouses, Baby Bunting aims to have its product range in-stock and available at the time of the customer’s purchase. Baby Bunting’s approach to pricing is centred on offering customers value every day, every visit. Baby Bunting’s “Our Price Promise” means that if a customer finds a lower price at a competitor on an identical in-stock product, Baby Bunting will beat it by 5%. Baby Bunting has a “Best Buy” range, with everyday low prices. The Best Buy range includes the core range of car seats, cots and furniture and carriers. Across its entire store network, Baby Bunting provides additional services to its customers, including click & collect services, layby, consumer payment services, parenting rooms which include baby weigh scales, and an in-store/online gift registry. Car seat installation services are provided (under the Baby On Board brand) at all Baby Bunting stores. Car seat hire services are also available in stores. The Company considers that its most successful marketing tool is word of mouth and it considers that it has a high unprompted brand awareness. This is a critical factor in allowing the Company to limit its marketing expenditure to under 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. 37 Baby Bunting Annual Report 2022 Directors’ report continued 2.2. Store network The Company currently operates, at the date of this report, a network of 65 stores across all Australian states and territories, except Northern Territory. The location and layout of stores is designed to deliver customers a consistent retail experience across the network. 2.3. People At the end of the financial year, the Company employed 1,536 employees with the majority employed at the Company’s stores, and others located at the Company’s Store Support Centre and Distribution Centre at Dandenong South (Vic). 2.4. Review of the Company’s operations During the financial year, the Company continued to implement its strategy to grow market share from existing stores and its online store as well as growing its network of stores. Key operational achievements for the Company in FY2022 included: • successfully transitioning to a new headless technology architecture, with the Australian website switching over to the new technology stack in January 2022; • continuing the roll out of the Company’s new loyalty program, “Baby Bunting family”, with the loyalty program now available across store and online platforms. The program finished the year with around 1.4 million members (up from around 1 million in the prior year) with around 705,000 members active in the last 12 months; • progressing the plans for the launch of the New Zealand store network, which has included signing leases for two stores (the first of which opened in Auckland in August 2022) and a lease for a warehouse, establishing a New Zealand store operations team and localising the New Zealand website offer for local pricing and local fulfilment; • building on the successful commissioning in March 2021 of the new National Distribution Centre at Dandenong South, with FY2022 being its first full year of operation. Significant progress was made in continuing the transition of suppliers from direct-to-store arrangements to DC supply arrangements and increasing FOB fulfilment, all of which contributes to efficiencies in supply chain costs and gross margin improvements; • opening four new stores, being Alexandria (NSW), Shepparton (Vic), Cairns (Qld) and Wagga Wagga (NSW), bringing the store network to 64 stores at the end of the year, along with refurbishing two stores and re-locating two existing stores to stronger locations within their catchments; • expanding the number of stores performing online fulfilment throughout the existing store network as the Company works towards its long term objective to fulfil 90% of online orders same day in metro areas. Forty-eight percent of online orders for the year were processed through the store network, rather than the Distribution Centre; • continuing the growth of the Company’s private label and exclusive products range, with these sales making up 45.3% of total sales for the year (up from 41.4%). With the support of supplier partners, exclusive products now make up 37.1% of sales and Baby Bunting’s private label range makes up 8.2% of sales; • expanding the range of products available through the Company’s online store and working to expand the overall product range; • expanding the Company’s support for community partners through the support for fundraising efforts for Perinatal Anxiety & Depression Australia (PANDA) and Life’s Little Treasures Foundation (a foundation that provides support, friendship and information, specifically tailored for families of premature or sick babies). Funds raised and contributed by the Company for these and other causes during the year was around $695,000 (up from $260,000 in the prior year). The effects of the COVID-19 pandemic continued to be felt on the Company’s operations during the year. The operational arrangements introduced in FY2020 and FY2021 continued into FY2022, including additional health and safety measures in stores and working from home arrangements (where possible) for the Store Support Centre team for large parts of the year. 38 The Company continued its policy of paid COVID-19 leave, to provide team members who were unable to work due to self-isolation measures or other carer obligations with paid leave. This policy provides paid leave to cover an affected team member for up to two weeks. The policy applies to full and part-time employees and casual employees. Border and travel restrictions within Australia introduced to manage COVID-19 had an impact on the manner in which some functions operated, with regional management practices occurring via technology. These restrictions also had some disruption on the timing of new store openings. Refer to the Chair and CEO’s Report on page 8 of this Annual Report for more information on the Company’s operations during the 2022 financial year. 2.5. Review of the Company’s financial performance The full year statutory results for the 52 week period ended 26 June 2022 (FY2021: 52 week period ended 27 June 2021) are summarised below: • Total sales up 8.3% to $507.3 million, with comparable store sales growth of 5.0% for the year; • Gross profit of $195.8 million up 12.7%; • Statutory net profit after tax (NPAT) of $19.5 million, an increase of 14.6% on the prior year; • Statutory basic earnings per share (EPS) of 14.9 cents; and • Cash and cash equivalents less borrowings (net debt) of $0.7 million (versus net cash of $0.9 million at the end of FY2021). In relation to the 2022 and 2021 financial years, the underlying operating results (as measured by pro forma earnings) are more clearly demonstrated with the following exclusions or adjustments: • employee equity incentive expenses: the primary economic impact is issued capital dilution if and when shares are issued; • business transformation project expenses: non-recurring project related expenses associated with significant one-off projects primarily focused around transition of business systems to modern platforms; • pro forma earnings before interest, tax, depreciation and amortisation exclude the impact of AASB 16 lease accounting. The Directors consider that these adjustments are appropriate to better represent the underlying financial performance of the business and to facilitate comparisons with prior periods. On a pro forma basis, the FY2022 financial results were: • pro forma earnings before interest, tax, depreciation and amortisation (EBITDA) was $50.5 million, up 16.1% on the prior corresponding period; • gross margin was 38.6%; • pro forma NPAT of $29.6 million, up 13.6% on the prior corresponding period; • pro forma costs of doing business (CODB) (excluding the impact of AASB 16 lease accounting) were $145.3 million or 28.6% of sales, an increase of 85 basis points on the prior corresponding period (CODB of 27.8% of sales in FY2021). A reconciliation between statutory and pro forma financial results is below. 39 Baby Bunting Annual Report 2022 Directors’ report continued Non-IFRS financial measures 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 financial measures are intended to supplement the measures calculated in accordance with Australian Accounting Standards and are not a substitute for those measures. Underlying operating and pro forma results and non-IFRS financial 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 Cost of doing business (CODB) Includes store, administrative, marketing and warehousing expenses (excluding pre AASB 16 depreciation and amortisation). EBIT Operating EBIT Pro forma EBITDA Pro forma financial results 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 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. Earnings before interest, tax, depreciation and amortisation expense (excluding the impact of AASB 16 lease accounting) and excludes pro forma adjustments included in the financial results below. In relation to the 2021 and 2022 financial years, the pro forma financial results have been calculated to exclude the impact of employee equity incentive expenses and business transformation project expenses. This has been done to more clearly represent the consolidated entity’s underlying earnings (noting that this financial information has not been audited in accordance with Australian Auditing Standards). Year ended 26 June 2022 $’000 Statutory results Employee equity incentive expenses1,2 Transformation project expenses3,4 Tax impact from pro forma adjustments5 Pro forma results Sales 507,274 - - - NPAT 19,521 9,330 4,668 (3,946) 507,274 29,573 1. Expense includes $8.570 million for the amortisation of performance rights (LTI) on issue in the current reporting period and the associated payroll tax costs of the plans. 2. The Company issued 135,051 shares under its General Employee Share Plan in the current reporting period with no monetary consideration payable by participating eligible employees who each received approximately $1,000 worth of shares ($0.760 million). 3. The Company is currently undertaking a process of assessment and when necessary, replacement of its core information technology systems. During the year, the Company incurred ($3.242 million) non-capital costs associated with the implementation of an order fulfilment system, Loyalty system, People systems, and digital technology assets. 4. Other transformation project expenses ($1.426 million) include external consultant costs associated with project management to deliver the transformation projects described in Note 3 above. The non-capital cost of external consultants are associated with running the selection and planning for the integration of the new systems are not related to day-to-day operations or financial performance of the business. These project costs cease at project completion. 5. Tax impact from pro forma adjustments includes income tax benefit relating to performance rights vesting under the Company’s Long Term Incentive Plan ($2.317 million). 40 The following table reconciles the statutory to pro forma financial results for the year ended 27 June 2021 (noting that this financial information has not been audited in accordance with Australian Auditing Standards): Year ended 27 June 2021 $’000 Restated1 Statutory results Employee equity incentive expenses2,3,4 Transformation project expenses5,6,7 Other operating income8 Tax impact from pro forma adjustments9 Pro forma results Sales NPAT 468,377 17,039 - - - - 8,170 8,317 (2,400) (5,095) 468,377 26,031 1. Refer to Note 2(aa) for detailed information on restatement of comparative in the Financial Statement for the period ended 26 June 2022. 2. Expense includes the non-cash cost amortisation of performance rights (LTI) on issue in the prior reporting period ($4.601 million). 3. The Company issued 165,221 shares under its General Employee Share Plan in the reporting period with no monetary consideration payable by participating eligible employees who each received approximately $1,000 worth of shares ($0.795 million). 4. The Company made a $2.774 million cash settled long term incentive payment to participating executives in connection with long term EPS performance rights (assessed over the period FY16 to FY20) granted by the Company in October 2015 as part of the Company’s Long Term Incentive Plan. This plan involves the issue of shares, however due to a timing difference between the $3.215 million impairment of certain digital assets in June 2020 and the receipt of a $2.400 million settlement payment from the vendor of those assets (refer Note (7) below), the original performance rights lapsed. If not for this timing difference, the compound annual growth rate of the Company’s EPS measured over the FY16 to FY20 performance period would have been 16.2% which would have resulted in 25.5% of the EPS performance rights vesting. The Board had regard to the significant earnings per share growth achieved since the Company’s IPO, as well as the direct connection between the impairment of the digital assets and the settlement payment recovered by the Company shortly after the end of the performance period. On this basis, the Board determined to provide a benefit to participating executives calculated by reference to the EPS performance rights that would have vested if the recovery were received during FY20. A share price of $4.09 was used to calculate the cash payments (based on 678,438 rights that would have otherwise vested). The share price was determined by reference to a VWAP of the Company’s shares in the period 1 July to 30 September 2020. 5. The Company undertook a process of assessment and when necessary, replacement of its core information technology systems. In FY21, the Company incurred ($2.889 million) non-capital costs associated with the implementation of a new online store, merchandise demand planning and replenishment system, order fulfilment systems, Loyalty system, People systems and assessment of digital technology assets. 6. The Company incurred $2.536 million in relation to the setup of the new National Distribution Centre including $1.265 million for the accelerated depreciation and make good of the former Distribution Centre. 7. Other transformation project expenses ($2.149 million) include external consultant costs associated with project management ($1.375 million) to deliver the transformation projects described in Note 5 above. The non-capital cost of external consultants are associated with running the selection and planning for the integration of the new systems are significant and not related to operations or financial performance of the business on the day-to-day basis. They cease at project completion. 8. The Company received a cash payment ($2.400 million) from the vendor of certain digital commerce technology assets that were impaired in FY20 following settlement of a dispute relating to those assets. 9. Tax impact from pro forma adjustments includes income tax benefit relating to performance rights vesting under the Company’s Long Term Incentive Plan ($2.249 million). 41 Baby Bunting Annual Report 2022 Directors’ report continued Revenue The sales for the year ended 26 June 2022 of $507.3 million represented an increase of 8.3% on FY2021. This sales growth was achieved through: • growth from existing stores; • growth in online sales; • growth from the opening of four new stores during FY2022; and • the annualising benefit of four stores opened in FY2021, trading for a full financial year in FY2022. Comparable store sales growth for the year was 5.0% up on the prior year. Comparable store sales growth is calculated having regard to the growth of stores that have been open for all of the prior financial year and includes click & collect sales fulfilled from the store. Stores not included in the comparable stores sales growth calculations in FY2022 were the four stores opened in FY2022 and the four stores opened in FY2021. Sales from private label and exclusive products grew by 18.3% on the prior year, and were 45.3% of total sales in FY2022, up from 41.4% in FY2021. This growth has partly come from the support of key suppliers expanding the range of their products sold exclusively through Baby Bunting. Categories where exclusive product ranges have expanded significantly include prams and strollers, cots and furniture and car safety (ie car seats). On a standalone basis, exclusive products represented 37.1% of sales in FY2022. Baby Bunting’s range of private label products include 4baby, Bilbi and JENGO. Sales of private label products represented 8.2% of sales in FY2022. Online sales continued to see strong annual growth. Total online sales (including click & collect) grew 24.2% on the prior financial year and click & collect sales grew 28.2%. Online sales now represent 22.2% of total sales, up from 19.4% in FY2021. Baby Bunting’s online channel and store networks are complementary. Online sales in a market catchment have consistently increased following the establishment of a Baby Bunting store in that area. Expenses Pro forma costs of doing business (CODB) expenses (excluding the impact of AASB 16 lease accounting) as a percentage of sales were 85 basis points higher year-on-year at 28.6% of sales (27.8% of sales in FY2021). In FY2022, pro forma CODB expenses were $145.3 million, up 11.6% on the prior year pro forma CODB expenses of $130.2 million. The increased investment in operating expenditure was driven by: • four stores opened in FY2021 trading for a full financial year in FY2022; • four new stores opened in FY2022; • the continued investment in the Store Support Centre team, the Distribution Centre 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; • one-off start up costs associated with establishing operations in New Zealand were $1.5 million and included project management team costs and third party consulting costs to initiate and integrate a number of core systems. 2.6. Review of the Company’s financial position The Company finished the financial year in a net debt position of $0.7 million, a change of ($1.6) million on the prior year net cash position of $0.9 million. This movement was driven primarily by a further investment in inventory safety stock to offset supply chain risks that included greater uncertainty of the timing of shipping arrivals. 42 Other key matters include: • payment of $19.5 million in dividends, relating to the FY2021 final dividend of $10.8 million (paid on 10 September 2021) and the FY2022 interim dividend of $8.7 million (paid on 11 March 2022); • investment in inventory of $16.7 million, with $3.1 million relating to new stores and the remainder to fund the growth and maintenance of appropriate levels of safety stock (including for suppliers now fulfilling direct to the National Distribution Centre); • capital expenditure of $12.6 million in FY2022; and • operating cash conversion of 71.0% and free cash flow of $18.8 million. Dividends The Board has determined to pay a final dividend of 9.0 cents per share fully franked. Together with the interim dividend of 6.6 cents per share, the total dividend to be paid in respect of FY2022 is 15.6 cents per share, equivalent to approximately 70% of the Company’s FY2022 pro forma NPAT. 3. Business strategies and future developments The Company’s strategy has remained constant during the year and is focused on growing its market share and continuing to improve its execution and financial performance. This strategy has the following key elements: 3.1. Invest in digital to deliver the best possible retailing experience across channels and enable new business models Baby Bunting has a multi-channel approach to grow market share. Baby Bunting’s goal is to create a seamless shopping experience across all channels. Investments in digital have continued to improve the customer experience across all channels. The loyalty program, Baby Bunting family, was made available across all channels during the year, and plays an important role in enabling better understanding of customers and work on personalising shopping journeys. Continually improving online fulfilment is also a key part of this strategy. Customers can transact online and have goods delivered directly or obtain the goods via contactless click & collect. The Company has expanded the number of store-based fulfilment hubs and stores capable of fulfilling online orders to 23 stores across its Australian network, with further investments in fulfilment capability planned for FY2023. These hubs and stores enable online orders to be fulfilled from selected stores supporting the long-term target of being able to fulfil 90% of metro online orders same day. In July 2020, the Company launched deliveries to New Zealand consumers through its website. In the first half, the New Zealand website transitioned on to the new headless technology architecture. The Company has recently expanded its New Zealand website offering, including by establishing fulfilment capabilities from New Zealand with the establishment of an Auckland distribution centre. This capability will be enhanced by the addition of physical stores in New Zealand, with the first store scheduled to open in August 2022. The transition of the Company’s e-commerce site to a new headless e-commerce architecture was completed during the year. This architecture enables Baby Bunting to leverage best of breed applications to deliver a world class customer experience through the digital channel. The Company, through a number of strategic initiatives, has plans to further broaden its total addressable market. These include plans to build out the range of products available online in specific categories. The Company has also commenced a project to work towards the launch of an Australian online marketplace. 43 Baby Bunting Annual Report 2022 Directors’ report continued 3.2. Invest to grow market share from Baby Bunting’s core business, including the roll out of new stores and formats, enhanced fulfilment, and new services to existing customers Baby Bunting’s key strategies to grow market share from its core business include: • improving customer experience. In this regard, Baby Bunting aims to be the leading place for parents and parents- to-be to come to for an extensive product range and great service, advice and guidance at great value everyday; • performing targeted and effective marketing campaigns. The Company’s loyalty program, Baby Bunting family, is enabling the Company to drive engagement with customers and to develop marketing having regard to customer preferences and product affinities; and • leveraging the store network to grow the services offered to customers. In addition to the car seat installation business — conducted under the Baby On Board brand — the services offer is growing to include car seat and other product hire. Growth from existing stores The Company’s stores historically take an average of four years to mature and generally 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. As at the report date, the Company’s store network includes a significant proportion of “immature” stores, with 17% of stores less than three years old and with plans to add at least 6 new stores in FY2023. The Company’s contactless click & collect service is a key feature and click & collect sales grew 28.2% during the year to be 10.4% of all sales. Click & collect sales are fulfilled in store, providing very convenient fulfilment times for customers. The Company’s store network also facilitates fulfilment of online orders, with 48% of all online orders during the year fulfilled from a store. As noted above, this capability helps move the Company towards its long-term target of being able to fulfil 90% of online metro orders same day. Store network plan Growing market share through the roll out of new stores is a key part of the Company’s growth strategy. The Company has a store network plan and is looking to continue to grow its network of stores to over 110 stores in Australia. This long-term network plan is predicated on the availability of suitable store locations that meet Baby Bunting’s rigorous return on investment hurdles. In assessing potential new stores, regard is had to site factors, the demographic profile of the target catchment, existing market share and the estimated effect of any sales re-direction on existing Baby Bunting stores. In pursuing this network plan, regard is also had to anticipated changes in future consumer behaviour and retail trends. The retail store sales have continued to grow year-on-year in addition to exceptional growth in online sales. This continues to highlight the complementary nature of Baby Bunting’s bricks and mortar stores and its online store. That is, online sales in a catchment without a store, increase following the opening of a Baby Bunting store in that same catchment. This highlights the very tactile nature of the industry in which Baby Bunting operates, where first time parents, in particular, like to visit stores to touch, feel and visually assess products as part of the product selection process. During the financial year ahead, Baby Bunting expects to continue to open new stores as it pursues its store network plan. 44 3.3. Growth from new markets leveraging Baby Bunting’s core competencies and data into adjacent categories, entering new geographies and expanding the value chain The Company’s core competencies include, among other things, large format retailing, merchandising, baby and maternity products, operating a network at scale and private label and product-led retailing. The Company also has an expanding range of insights about baby goods consumers. During the year, the Company has pursued its strategy of establishing operations in New Zealand. The Company’s first store in New Zealand is expected to open in Auckland in August 2022 with more stores to follow, with a target of a network of more than ten stores. To support the store operations, the Company has established a distribution centre in Auckland. Opportunities might also exist to apply Baby Bunting’s skills in adjacent retail categories, where the ability to leverage existing customer insights could greatly expand the potential market opportunities. While the immediate focus is on growing market share from Baby Bunting’s core business, consideration will be given to exploring opportunities that will provide growth in future periods. 3.4. Profit margin improvement by increasing scale, developing private label and exclusive products and leveraging infrastructure to reduce the cost of doing business The Company improved its pro forma EBITDA margin from 9.3% in FY2021 to 10.0%. Specifically, the Company’s Australian operations (that is excluding the costs and revenues of the early stage New Zealand operations) went from 9.3% to 10.4%. This was delivered through full year gross margin of 38.6% an improvement of 151 basis points from the prior year. The pro forma cost of doing business deleveraged year-on-year, increasing by 85 basis points in FY2022. EBITDA margin improved throughout the year, and on a full year basis, Baby Bunting achieved its long term target of a pro forma EBITDA margin of 10.0%. A key driver to grow margin improvement is the growth in private label and exclusive product offerings. The Company offers private label products in strollers, pram, change tables, manchester, babywear, portacots, rockers, 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 continue to facilitate further margin improvement in future periods. During the year, private label and exclusive products grew to represent 45.3% of sales, an increase from 41.4% over the previous year. This was largely driven by the support of key suppliers expanding the range of their products sold exclusively through Baby Bunting. The Company has also continued to expand the products made available under its private label brand known as JENGO. Products available under this brand include prams, travel cots and other hard goods items. Another element of the Company’s strategy for profit margin improvement is the investment made in the Company’s new National Distribution Centre in Dandenong South. This was commissioned in March 2021, and FY2022 was the first full year of operations at the site. Supply chain efficiencies were achieved by, among other things, converting certain suppliers from direct-to-store fulfilment to fulfilment by the Distribution Centre and increasing FOB purchasing. In addition, the use of store-based fulfilment hubs will continue to play a critical role in facilitating prompt delivery of online orders. Other areas of focus continue to be upgrades of selected store elements and store refurbishments. 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. 45 Baby Bunting Annual Report 2022 Directors’ report continued 4. Material business 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 a structured risk management framework and internal control systems in place to manage material risks (see page 33 for further information on the Company’s risk management framework). Some of the other 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. Risk Description Mitigation Although the purchase of baby goods is less discretionary than 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 consumer confidence, including as a result of increases in interest rates and the rate of inflation, or more generally, may cause consumers to reduce the size or extent of purchases with the Company, which could have an adverse effect on sales and the Company’s financial performance. Public health restrictions, of the kind seen introduced with COVID-19, may also affect consumer sentiment. The COVID-19 pandemic has been an example of an event that has given rise to significant business interruption since its emergence in Australia around March 2020. Other unanticipated events such as natural disasters, wars, strikes and epidemics have the potential to materially affect the Company through their impact on supply chain, consumer behaviour and company operations. Some may pose a threat to the health and safety of those who work and shop with the Company. These events can arise rapidly with little or no warning and their duration and the subsequent recovery period is uncertain and may be protracted. The Company faces competition from specialty retailers as well as department stores, discount department stores and online only retailers. International online retailers and marketplaces are also sources of current and future competition. Second hand or buy, swap, sell markets, which facilitate the exchange of used baby goods, are also a source of competition for the Company. In addition, direct to consumer operators (without a physical store network) compete with the Company in specific product categories. Competition is based on a variety of factors including price, merchandise range, advertising, store location, store presentation, product presentation, new store roll-out and customer service. External economic factors affecting consumer sentiment Business interruption Competitive and digital disruption risks 46 Noting the essential nature of the Company’s products, the Company seeks to ensure that it has a broad range of products across a range of price points, with a focus on value for customers every day. The Company has a risk management framework intended to identify key risks and develop risk control measures. Mitigants include seeking to avoid over- concentration on a key supplier or provider (of goods or services) and maintaining an appropriate insurance program. Business continuity and disaster recovery planning is also undertaken. The Company seeks to address competitive risks by focusing on providing customers with low prices, every day. In addition, the Company is focused on providing an excellent customer experience — regardless of whether the customer is visiting a Baby Bunting physical store or the online store. Elements of this experience include quality advice, high service levels and a very wide product range. Product differentiation through exclusive access to key brands is a strategy to mitigate this risk. Risk Description Mitigation Supply chain risks Supplier relationships Workplace and people management risks 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 events of global significance that disrupt global supply chains, 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. 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. 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’s future performance depends to a significant degree on its key personnel, and its ability to attract and retain experienced and high performing personnel. At times of full or near-full employment, competition to attract and retain employees can become more pronounced with the result that the time and costs to recruit increase. The Company continues to focus on logistics and technology initiatives to ensure that this risk is managed appropriately. While the Company’s new National Distribution Centre has reduced the need for third party logistics facilities, they remain available to assist in managing supply chain risks by carrying additional inventory. The Company continues to invest in its merchandising team to continue to ensure that it is appropriately managing relationships with its suppliers. 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 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 continues to make investments in training and development to further expand the skills of the Company’s employees. 47 Baby Bunting Annual Report 2022Directors’ report continued Risk Description Mitigation Cyber, technology and information risks Regulatory compliance In common with other retailers, the Company faces a range of cyber risks. This is a broad concept and encompasses a variety of risks that could impact computer systems and that could result in unauthorised access or disclosure of information held by the Company (including the personal information of our customers), the commission of fraud or theft, or the disruption of normal business operations. 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 cybersecurity violation, could adversely impact Baby Bunting’s ability to trade and to meet the needs of its customers. Unauthorised disclosure of, or unauthorised access to, personal information under the control of the Company could have an adverse effect on the Company’s reputation and ultimately the Company’s financial performance. The Company has a continuing focus on IT systems and security, 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 and cyber related events. Investments in team, security systems and processes continue to be made. IT infrastructure and data assets have been migrated to an external data centre and the Company remains focused on constantly improving its ability to prepare and respond to a cyber attack or other adverse event. The Company also has systems and processes in place designed to appropriately use and secure customers’ personal information. Baby Bunting is subject to government laws and regulations, including competition and consumer laws and trade, taxation and workplace health and safety laws. Many of the products sold in Baby Bunting’s stores or online must comply with mandatory product safety standards. In addition, products Baby Bunting sells must comply with general product safety requirements under applicable law and also meet the expectations of our consumers. Failure to do so may require the Company to, among other things, undertake a recall of products or other actions. This 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. Investments in the Company’s quality assurance and compliance team and equipment continue to ensure that product compliance remains a key focus. The Company also engages an external compliance advisory company that performs periodic audits of product compliance and provides training and advice on particular compliance matters. The Company seeks to manage this risk through appropriate project governance, management and resourcing. Business transformation risks The Company has a plan to continue making investments in new technology systems, including core system enhancements and other technology projects. The Company is also undertaking a range of business transformation projects. A failure to implement technology changes effectively or to manage and complete projects successfully could have an adverse effect on the Company’s financial performance where new technology or projects cost more, take more time to implement and/or fail to achieve anticipated business benefits. 48 Risk Description Mitigation Property roll-out risks Environmental, social and governance (ESG) responsibility The Company’s new store roll-out strategy depends upon securing properties that meet the Company’s rigorous selection criteria, at financially viable rents. A failure to secure appropriate sites could impact the Company’s financial performance and position. As the Company’s stores are leased the ability to continue in a store is subject to negotiation at the end of each lease term. Restrictions on movement between states and territories and within cities or regions, as occurred during the recent COVID-19 pandemic years, can disrupt store site selection and new store development activities. To the extent these restrictions are ongoing, the Company’s store roll-out activities may be temporarily delayed. Additionally, increases in materials and labour in the construction industry (occurring due to the disruption caused by COVID-19 and global factors) may lead to increases in store development costs. The Company’s stakeholders (customers, suppliers, team members and shareholders) have expectations for Baby Bunting on a range of environmental, social and governance matters. A failure to acknowledge and adequately address these expectations over time could negatively impact the Company’s reputation and profitability. The Company actively manages its property portfolio to ensure appropriate sites continue to be available for its stores. The Company has a Group Property Leasing Manager who builds and maintains relationships with landlords and focuses on new market opportunities. Baby Bunting has adopted a sustainability strategy and commenced reporting on its approach to ESG matters in its Sustainability Report. Baby Bunting also discloses the manner in which it seeks to eliminate the risk of modern slavery in its operations and supply chain in its Modern Slavery Statement. 5. Significant changes in the state of affairs in FY2022 There were no significant changes in the state of affairs of the Group during the financial year. 49 Baby Bunting Annual Report 2022 Directors’ report continued 6. Matters subsequent to the end of the financial year Apart from the determination to pay a final dividend in respect of the financial year ended 26 June 2022, 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: Dividend Final dividend in respect of the financial year ended 27 June 2021 (8.3 cents per share fully franked) Interim dividend in respect of the half year ended 26 December 2021 (6.6 cents per share fully franked) $’000 10,772 8,740 The Board has determined to pay a final dividend in respect of the financial year ended 26 June 2022 of 9.0 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 2022 and the dividend payment date is 9 September 2022. The final dividend of 9.0 cents per share, when combined with the interim dividend of 6.6 cents per share, represents a payout ratio of approximately 70% 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 Date retired Melanie Wilson Chair (from 5 October 2021) 15 February 2016 - Ian Cornell Matt Spencer Gary Levin Donna Player Gary Kent Francine Ereira Stephen Roche Chair (from 21 November 2016) 1 January 2015 5 October 2021 CEO and Managing Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director 23 April 2012* 25 August 2014 16 January 2017 12 December 2018 1 September 2021 1 September 2021 - - - - - - * Matt Spencer joined the Company in February 2012 as CEO. He was appointed a Director on 23 April 2012. Details of the qualifications, experience and special responsibilities of each current director are set out on pages 20 and 21 of the Annual Report. 50 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 2022 are set out below. All directors are invited to attend Board Committee meetings and 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 Melanie Wilson Ian Cornell Matt Spencer Gary Levin Donna Player Gary Kent Francine Ereira Stephen Roche Meetings of directors Audit and Risk Committee Remuneration and Nomination Committee Attended Held Attended Held Attended Held 11 3 11 11 11 11 9 9 11 3 11 11 11 11 9 9 2 - - 6 - 6 - 4 2 - - 6 - 6 - 4 4 1 - - 4 2 2 - 4 1 - - 4 2 2 - Attended = Number of meetings attended by the director. Held = Number of meetings held during the time the director held office or was a member of the committee during the year. Ian Cornell retired as a director on 5 October 2021. 10. Directors’ relevant interest 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 Melanie Wilson Matt Spencer Gary Levin Donna Player Gary Kent Francine Ereira Stephen Roche Ordinary shares Performance rights 30,000 Nil 1,227,589 1,198,000 150,000 36,000 24,000 4,110 35,000 Nil Nil Nil Nil Nil 51 Baby Bunting Annual Report 2022 Directors’ report continued 11. Company secretaries 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 as a corporate lawyer at a national law firm. He holds a Bachelor of Laws (Hons) 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 The CEO and Managing Director was the only Director eligible to participate in the Company’s long term incentive plan (LTI Plan). Further details of the LTI Plan are set out on pages 63 to 70 of the Remuneration Report. Each performance right entitles the holder to receive one fully paid share in the Company, subject to the satisfaction of the applicable performance conditions. During the financial year, the Company granted 1,375,000 performance rights under the LTI Plan. In addition, 2,504,000 performance rights, along with 564,000 retention rights, vested and were exercised. No performance rights were forfeited in accordance with the rules of the LTI Plan. All of the performance rights granted during the financial year are subject to performance conditions (see pages 63 and 64 of the Remuneration Report for more details). Performance right event Opening balance (28 June 2021) Vesting of rights (6 August 2021) Vesting of rights (27 October 2021) Grant of rights under the LTIP Plan – FY2021 to FY2024 award (23 November 2021) Vesting rights (21 April 2022) Closing balance Issue price Number of performance rights 8,039,000 n/a (530,000) n/a (2,504,000) nil 1,375,000 (34,000) 6,346,000 13. Details of options There are no options over shares on issue as at the date of this Directors’ Report and no shares were issued during the year as a result of the exercise of options. 14. Remuneration Report The Remuneration Report, which forms part of this Directors’ Report, is presented separately from page 55. 15. Indemnification and insurance of directors and officers and the auditor 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). 52 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. To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. 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. 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. 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 (Ernst & Young) for audit and assurance services ($191,400) (FY2021: $173,400) and for non-audit services ($30,435) (FY2021: $26,624) provided during the year are set out in the Financial Statements (at Note 30). The major element of non-audit services during the year related to taxation services. The Board has considered the position and in accordance with advice received from the Audit and Risk Committee, is satisfied that the provision of non-audit services is compatible with the general standard of independence imposed on auditors 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. 53 Baby Bunting Annual Report 2022 Directors’ report continued 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 77. 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 instrument 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 Melanie Wilson Chair 12 August 2022 54 Remuneration report 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 2022. The information provided in this Remuneration Report (other than in section 3.1 and the pro forma NPAT figures at the end of section 6.3.4) has been audited as required by section 308(3C) of the Corporations Act 2001. 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 Melanie Wilson Gary Levin Donna Player Gary Kent Non-executive Director Non-executive Director Non-executive Director Non-executive Director Francine Ereira (appointed 1 September 2021) Non-executive Director Stephen Roche (appointed 1 September 2021) Non-executive Director Former Non-executive Director Ian Cornell (retired 5 October 2021) Non-executive Director Disclosed executives Matt Spencer Darin Hoekman CEO and Managing Director 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 to build and deliver value to shareholders over the long term. A copy of the Committee’s Charter is available at babybunting.com.au/investor. 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 51 of the Directors’ Report. 55 Baby Bunting Annual Report 2022 Remuneration report continued 3. Remuneration outcomes for FY22 3.1. Realised remuneration received This section 3.1 has been included in the Remuneration Report to show the “realised” remuneration of the disclosed executives. The table in this section 3.1 supplements, and is different to, the statutory remuneration tables (see section 8) which presents the accounting expenses for both vested and unvested performance rights in accordance with Australian Accounting Standards. The table shows the remuneration the CEO and Managing Director and the Chief Financial Officer realised in relation to the 2022 financial year as cash, or in the case of prior equity awards, the value which vested in 2022. The value of equity awards uses a point in time share price; in this case $5.85 per share and $5.95 per share (as described below). Whether a disclosed executive receives that value in cash, depends on the share price at the time at which any share is sold. The Company’s share price at the end of the financial year was $4.14. STI variable cash remun- eration2 $ LTI linked remun- eration3 $ Fixed remun- eration1 $ Long term incentives which vested during the year4 $ Total cash $ Other shares benefits5 $ Realised remun- eration received $ Long term incentives which lapsed/ forfeited during the year $ Disclosed executives Matt Spencer Darin Hoekman 2022 2021 2022 2021 607,793 - - 607,793 3,510,000 581,754 214,610 1,033,325 1,829,689 2,311,075 433,426 - - 433,426 3,321,750 – - - 4,117,793 4,140,764 3,755,176 411,675 150,840 411,909 974,424 974,692 999 1,950,115 - - - - The point in time value of previously deferred remuneration granted as performance rights is based on the closing price of the Company’s shares traded on the ASX on the date of issue of shares following the exercise of the rights or lapsing/forfeiture multiplied by the number of rights. For FY2022, the closing share price on 27 October 2021 was $5.85; being the date of issue of shares in respect of the performance rights that vested during the year. The closing share price on 6 August 2021 was $5.95; being the date of issue of shares upon vesting of the retention rights. 1. Fixed remuneration includes superannuation contributions. 2. As the performance conditions were not satisfied, no payment will be made under the FY2022 STI plan (see section 6.2 below). 3. During FY2021, LTI linked remuneration represents cash payments made in December 2020 in connection with the long term incentive payments related to EPS rights (FY2016 to FY2020) (see section 3.4 of the 2021 Remuneration Report). 4. During FY2022, the vested performance rights were the performance rights granted under the FY2018 to FY2021 award that were assessed against a TSR CAGR performance condition and an EPS CAGR performance condition (600,000 rights for Matt Spencer and 400,000 rights for Darin Hoekman). The closing share price of $5.85 has been used for this purpose. In respect of Darin Hoekman only, they also include 165,000 retention rights that vested and were exercised, with new shares issued, in August 2021. The closing share price of $5.95 has been used for this purpose. During FY2021, the vested performance rights were the performance rights granted under the FY2016 to FY2020 award that were assessed against the TSR CAGR performance condition. 5. Other share benefits relate to shares provided under the General Employee Share Plan and are valued using that acquisition price under that plan. 56 3.2. FY2022 fixed remuneration – disclosed executives The remuneration of disclosed executives is reviewed by the Board annually, with any changes to take effect in September. Having regard to the uncertainty associated with COVID-19 related lockdowns that were in effect in August and September 2021, the Board determined at that time that it was appropriate that the fixed remuneration of the CEO and Managing Director and the Chief Financial Officer remain unchanged. In February 2022, the Board reviewed this position having regard to the Company’s financial performance and the market conditions prevailing at that time. Following this review the Board identified that the base remuneration paid to the CEO and Managing Director and Chief Financial Officer was substantially below the median of a comparable group of ASX-listed retail companies. Data on comparator group of companies was taken from remuneration disclosures made for the 2021 financial year. Noting that their base remuneration was last varied with effect in September 2020 and having regard to the differences between their fixed rate of pay and the comparator group, the Board determined to increase the fixed remuneration of the CEO and Managing Director and the Chief Financial Officer by 10%. These changes took effect on 1 February 2022. 3.3. FY2022 short term incentive payments The Company’s short term incentive plan operated again for the 2022 financial year. For the 2022 financial year, pro forma NPAT growth was 13.6%. The “threshold” growth target level for short term incentive payments was set at 10% pro forma NPAT year-on-year inclusive of the costs of any short term incentive payments. While the headline pro forma NPAT growth was above this level, allowing for potential STI payments results in the threshold growth target level not being achieved. Therefore, no STI payments were awarded under the plan for FY2022. See Section 6.2 for further details. 3.4. FY2018 to FY2021 performance rights – vesting of TSR rights and EPS rights On 27 October 2021, the Company issued a total of 2,504,000 ordinary shares to eligible participants in the Company’s Long Term Incentive Plan upon vesting of the TSR Rights and EPS Rights that had been provided under the FY2018 to FY2021 grant. The CEO and Managing Director received 600,000 shares and the Chief Financial Officer received 400,000 shares. These rights vested following satisfaction of the TSR compound annual growth performance hurdle and the EPS compound annual growth performance hurdle. The TSR compound annual growth rate of the Company’s total shareholder return in the period from 30 September 2018 to the end of the 2021 VWAP period (ie 1 July 2021 to 30 September 2021) was 39.3% (including dividends reinvested). The EPS compound annual growth rate of the Company’s earnings per share from the end of FY2018 to the end of FY2021 was 38.3%. As these levels exceeded 20%, all of the available TSR Rights and EPS Rights vested. 57 Baby Bunting Annual Report 2022Remuneration report continued 3.5. Vesting of retention rights As disclosed in the 2021 Remuneration Report, after the end of the 2021 financial year, in July 2021, the Board assessed the conditions attached to the retention rights and determined that the vesting conditions had been satisfied and 530,000 rights vested in July 2021, with 165,000 rights received by the Chief Financial Officer. Those rights were exercised by the six participants and 530,000 ordinary shares were issued in early August 2021 (the CEO and Managing Director did not receive any retention rights). In March 2022, a further 34,000 retention rights held by one participant, vested and 34,000 ordinary shares were issued on 21 April 2022. There are no retention rights outstanding. See Section 6.3.5 for further information on the retention rights. 3.6. Grant of performance rights (FY2021 to FY2024 grant) Following shareholder approval at the 2021 AGM, the Company granted the CEO and Managing Director, 185,000 performance rights under the FY2021 to FY2024 grant. Approval for the grant was obtained under ASX Listing Rule 10.14. An additional 1,190,000 performance rights were granted on the same terms to eleven other executives (including the Chief Financial Officer who was granted 175,000) participating in the Company’s Long Term Incentive Plan. Details of the terms and conditions of this grant are contained in Section 6.3.1 below. 3.7. 7th Employee Share Plan Gift Offer The Company conducted its 7th Employee Share Plan Gift Offer in October 2021 and provided over 760 team members $1,000 of Baby Bunting shares. The Company has operated this gift share program for each year since its IPO in 2015 and as a result around 50% of team members are shareholders. See Section 6.4 below. 4. Key developments and future changes 4.1. Achieving a reduced proportion of performance rights Over the last few years, the Board has been adjusting the mix of executive remuneration to reduce the proportion of “at-risk” remuneration represented by long term incentives. At the end of the 2022 financial year, the number of rights outstanding represents approximately 4.8% of the Company’s issued capital. There are currently 2,311,000 rights outstanding in respect of the FY2019 to FY2022 grant. The Board will assess whether these rights have satisfied the relevant performance hurdles in October 2022, after which time these rights will either be exercised or lapse. When determining the number of rights to be granted for an award with a three year performance period, the Board’s policy is to ensure that number of rights is generally equivalent to around 1.0% of the Company’s issued capital. The rights are then allocated among participants having regard to the participant’s performance, incentive and retention considerations and the mix of the participant’s remuneration. The Board intends to grant up to approximately 1.375 million rights in respect of the FY2022 to FY2025 period (see 4.3 below). Assuming these rights are granted and noting that the rights outstanding in relation to the FY2019 to FY2022 grant will cease to exist in October 2022, the number of rights outstanding is expected to be at or below 4.0% of the Company’s issued capital. This number is expected to reduce further in future years. Participants in the Company’s Long Term Incentive Plan are still provided with a substantial incentive, noting the appreciation in the Company’s share price since the introduction of the plan and the potential value that each right represents. 58 4.2. FY2023 short term incentive plan The FY2023 short-term incentive plan will operate on a similar basis to the prior years: there will be no eligibility to receive any payments until the Board’s earnings growth target has been achieved and the participant has achieved satisfactory ratings in respect of their performance and values. 4.3. Long term incentive plan – FY2022 to FY2025 grant The Board intends to grant the CEO and Managing Director performance rights, subject to approval by shareholders at the 2022 AGM. In addition, a further 11 executives (including the Chief Financial Officer) will participate in the proposed grant, with the total number of rights to be granted not exceeding 1.375 million rights. The number of rights to be granted to the CEO and Managing Director and Chief Financial Officer have not been determined at the time of finalising this Remuneration Report. However, it is anticipated that the terms of any grant will be generally similar to the grant made last year (the FY2021 to FY2024 grant – see section 6.3.1 below). 5. Relationship between remuneration and the Company’s performance The following table shows key performance indicators for the Company over the last five years. EBITDA (statutory) $’000 Net profit after tax (statutory) $’000 Net profit after tax (pro forma) $’000 Dividends per share – ordinary (cents) Basic earnings per share (cents) (statutory) Earnings per share (cents) (pro forma) Share price at the end of the financial year 2018 17,549 8,686 20191 46,281 11,646 2020 46,119 9,986 20212 2022 56,833 67,052 17,039 19,521 9,607 14,388 19,291 26,031 29,573 5.3 6.9 7.6 8.4 9.2 11.4 10.5 7.8 14.1 13.2 15.6 14.9 15.2 20.2 22.5 Growth in 2022 CAGR last 5 years 18% 15% 14% 11% 12% 11% 40% 22% 32% 31% 21% 31% $1.36 $2.16 $3.30 $5.42 $4.14 -24% 32% 1. At the end of FY2020, the results for FY2019 were restated to reflect the full retrospective adoption of the lease accounting standard AASB 16. Refer to Note 2(x) in the Financial Report for the year ended 28 June 2020. 2. At the end of FY2022, the results for FY2021 were restated to reflect changes in the accounting policy in relation to configuration and customisation costs incurred in implementing SaaS arrangements. Refer to Note 2(aa) for detailed information on restatement of comparatives in the Financial Report for the year ended 26 June 2022. 59 Baby Bunting Annual Report 2022 Remuneration report continued 6. Remuneration policy and practices The Company’s remuneration policy seeks to appropriately reward, incentivise and retain key employees, by providing a link between remuneration outcomes and both the Company’s and an individual’s performance. The remuneration practices adopted by the Company include the use of fixed and variable remuneration, and short term and long term performance based incentives. For disclosed executives, the Board has a philosophy of supporting a smaller proportion of fixed remuneration (relative to comparable ASX companies) and a large proportion of “at-risk” remuneration. A focus over the last few years has been to progressively adjust the overall remuneration mix towards an increased proportion of fixed pay aligned to other comparable ASX companies). However, “at-risk” remuneration will continue to represent a significant proportion of an executive’s remuneration mix. For FY2022, the target remuneration mix for the CEO and Managing Director can be represented below: 31% 18% 51% Base rem STI opportunity LTI opportunity For FY2022, the target remuneration mix for the Chief Financial Officer can be represented as set out below: 26% 16% 58% Base rem STI opportunity LTI opportunity These representations use the amount of base remuneration (including superannuation) as at 1 February 2022 (being the date at which the base remuneration amount was most recently reviewed – noting that the usual review in September 2021 was deferred to enable an assessment of the impact of the ongoing COVID-19 pandemic). STI opportunity is calculated by reference to the maximum STI amount available (being 60% of base remuneration). Noting that for FY2022, no STI amount is payable to the CEO and Managing Director and the Chief Financial Officer (for the reasons described in section 6.2 below). The LTI opportunity is the number of share rights granted in November 2021 multiplied by the Company’s share price on the date of grant (being $5.80). 6.1. 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 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). 60 6.2. 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 principal 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 additional 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. Gateway for short term incentive payments for FY2022 For participants to become eligible to receive a payment under the STI plans in FY2022, there were the following gateways: • the participant’s performance evaluation rating for the year must exceed an acceptable rating for both performance and values, as assessed by the participant’s manager or, in the case of the CEO and Managing Director, the Board; and • the Company’s pro forma NPAT (inclusive of payments to be made under the STI plans) must be at least 10% higher than the prior year (this is known as “threshold” growth). Potential STI payments for FY2022 For FY2022, the CEO and Managing Director and the Chief Financial Officer had the opportunity to earn a maximum short term incentive payment of an amount equal to 60% of their base remuneration. At “threshold” growth, the opportunity was equal to 30% of base remuneration. Where pro forma NPAT growth exceeds “threshold” growth of 10%, the potential STI payment increases on a scale up to 60% of base remuneration. This scaling is to encourage and reward performance in achieving extraordinary NPAT growth. Performance conditions and determining the potential STI benefits for FY2022 The size of each participating executive’s actual STI payment is determined by applying financial and additional criteria. There is a large weighting of the performance conditions to the Company’s financial performance (which represent 70% of the weighting of the potential STI benefit), reflecting the principle that benefits under the STI plan are to be provided primarily when the Company has performed well. The additional criteria represent 30% of the potential STI benefit and were selected to focus on particular commercial, operational or sustainability goals. Once “threshold” growth has been met (and the other gateways for eligibility have been satisfied), any actual STI payment is based on the extent of the pro forma NPAT growth and the satisfaction of other specific additional performance criteria. Minimum potential STI Maximum potential STI Potential STI for FY2022 If pro forma NPAT growth of 10% is achieved If pro forma NPAT growth of 30% is achieved Pro forma NPAT growth of below 10% (after allowing for STI payments) Achievement of pro forma NPAT condition 21% of base remuneration becomes payable 42% of base remuneration becomes payable 0% of base remuneration becomes payable Achievement of all additional performance criteria (KPIs) 9% of base remuneration becomes payable 18% of base remuneration becomes payable 0% of base remuneration becomes payable Total STI potential STI payment 30% of base remuneration 60% of base remuneration 0% of base remuneration 61 Baby Bunting Annual Report 2022Remuneration report continued The pro forma NPAT growth against the prior year was 13.6%. However, allowing for potential STI payments to all participants (not just the disclosed executives), this amount falls below the “threshold” growth target level. Accordingly, no STI payments were awarded under the plan for FY2022. The additional performance criteria that applied to the disclosed executives for FY2022 were: Disclosed executives Additional criteria Comment Matt Spencer and Darin Hoekman KPI #1 Achievement of Net Promoter Score performance and Lost Time Injury Frequency Rate (LTIFR) KPI #2 New Zealand operations commenced in country This was achieved as NPS finished the year at 72 and the LTIFR was 8.44. This was not achieved during FY2022. The first store in Auckland opens in August 2022. COVID-19 travel restrictions impacted store opening activities in FY2022. KPI #3 KPI #4 Matt Spencer (alone) KPI #5 KPI #6 Cost of Doing Business expense ratios to be below a targeted level This was achieved. Supply chain and fulfilment strategy matters (not disclosed due to commercial sensitivities) Further work on this matter continues into FY2023. Range expansion initiatives (not disclosed due to commercial sensitivities) Further work on this matter continues into FY2023. Senior leadership team career planning and development initiatives (not disclosed due to commercial sensitivities) This was achieved. Darin Hoekman (alone) KPI #5 KPI #6 Execution of property pipeline activities for FY23 and beyond (not disclosed due to commercial sensitivities) This was achieved. Improvement in the Company’s cyber-security posture This was achieved. The focus on cyber-security remains ongoing with continuing efforts to maintain and enhance our cyber-security posture. 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. 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, 100% of the potential STI payment was forfeited. If they are awarded, STI plan benefits are paid in cash and reflect amounts earned during the financial year and are provided for in the annual financial statements. 62 6.3. Long term incentives The Long Term Incentive Plan (LTI Plan) is designed to align the interests of disclosed executives and participating 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 “rights”. Upon vesting, each right entitles the participant to one fully paid ordinary share in the Company. Participation in a grant under the LTI Plan is by invitation. The Board may determine which executives or other employees are eligible. For grants of performance rights, whether a right vests depends upon the achievement of performance conditions. For this purpose, the Board has selected two performance conditions being: • growth in the Company’s profit (as measured by earnings per share growth); and • growth in returns to shareholders (as measured by total shareholder return, which includes share price appreciation and dividends reinvested). The conditions are measured on an absolute basis – that is, growth is measured having regard to the Company’s earnings or share price from a prior period. The Board considers this to be appropriate given the current stage of the Company’s development and the desire to ensure that management seek sustainable and profitable growth. On this basis, rewards to participating executives are firmly linked to the performance of the Company. During the 2022 financial year, a single grant was made under the LTI Plan and details of that grant are provided in Section 6.3.1. Information on grants made in previous years that remain outstanding are also contained in this section. As at 26 June 2022, the number of performance rights outstanding was: Long Term Incentive Plan grant Performance rights FY2019 to FY2022 grant FY2020 to FY2023 grant FY2021 to FY2024 grant EPS Rights TSR Rights 1,155,500 1,155,500 1,330,000 1,330,000 550,000 825,000 The Board will determine in October 2022 whether the FY2019 to FY2022 grant of EPS Rights and TSR Rights have vested having regard to the compound annual growth rate in EPS and TSR. 6.3.1 FY2021 to FY2024 performance rights grant During the 2022 financial year, the Board made a grant under the Long Term Incentive Plan for the period FY2021 to FY2024. This grant is referred to as the FY2021 to FY2024 grant. Under this grant, the Board granted 1,375,000 performance rights (in total) to the CEO and Managing Director, the Chief Financial Officer and ten other participating executives. The grant to the CEO and Managing Director was approved by shareholders at the Company’s 2021 AGM. The FY2021 to FY2024 grant is the first grant under the Long Term Incentive Plan where the EPS performance condition will be assessed having regard to a pro forma NPAT calculation that includes the statutory employee equity incentive expense and uses a denominator that is the average weighted number of ordinary shares on issue for the period. This change was foreshadowed in the 2021 Remuneration Report. 63 Baby Bunting Annual Report 2022 Remuneration report continued Terms and conditions of the FY2021 to FY2024 performance rights grant Performance conditions and performance periods EPS growth performance condition TSR growth performance condition The number of rights that vest will be determined by reference to two performance conditions: • earnings per share (EPS) growth; and • total shareholder return (TSR) growth. Forty percent of the rights granted are subject to the EPS growth performance condition (EPS Rights). Sixty percent of the rights granted are subject to the TSR growth condition (TSR Rights). 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 from a base level of pro forma EPS in FY2021 (being 14.1 cents per share). This base level EPS was calculated by dividing the Company’s pro forma NPAT for the financial year ended 27 June 2021 (excluding any unusual items but including the statutory employee equity incentive expense) by the average weighted number of ordinary shares on issue for the 2021 financial year. Broadly, TSR is a measure of the increase in the Company’s share price (assuming dividends are reinvested). 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 $5.55 used as the base level. (This number was the volume weighted average price of the Company’s shares on ASX in the period 1 July 2021 to 30 September 2021). The compound annual growth rate in the Company’s TSR is measured at the end of the relevant performance period, having regard to the volume weighted average sale price on ASX of the Company’s shares (as determined by the Board) in the period from 1 July to 30 September 2024 (inclusive) or such other period as the Board considers appropriate. Performance periods The performance period ends after the conclusion of FY2024. If a performance right does not vest at the end of this performance period it lapses. There is no retesting. Vesting schedule • 30% of the EPS Rights will vest if the minimum • 30% of the TSR Rights will vest if the minimum EPS growth hurdle condition of 10% EPS CAGR is achieved; TSR growth hurdle condition of 10% TSR CAGR is achieved; • 100% of the EPS Rights will vest if the EPS • 100% of the TSR Rights will vest if the TSR growth hurdle of 20% EPS CAGR is achieved; and growth hurdle of 20% TSR CAGR is achieved; and • if the EPS CAGR is within the range of 10% to • if the TSR CAGR is within the range of 10% to 20% EPS CAGR, the number of EPS Rights that will vest will be pro-rated on a straight-line basis for between 30% and 100% of the EPS Rights 20% TSR CAGR, the number of TSR Rights that will vest will be pro-rated on a straight-line basis for between 30% and 100% of the TSR Rights. Once the performance right has vested, the participant will have two years in which to exercise the vested right and be provided with a share. To ensure ongoing alignment with shareholders, half of any shares that are issued to a participant upon vesting and exercise of a right will be subject to a 12 months disposal restriction. Post-vesting disposal restriction 64 6.3.2 FY2020 to FY2023 performance rights grant (historical) During the 2021 financial year, the Board made a grant under the Long Term Incentive Plan for the period FY2020 to FY2023. This grant is referred to as the FY2020 to FY2023 grant. Under this grant, the Board granted 2,660,000 performance rights (in total) to the CEO and Managing Director, the Chief Financial Officer and ten other participating executives. The grant to the CEO and Managing Director was approved by shareholders at the Company’s 2020 AGM. Terms and conditions of the FY2020 to FY2023 performance rights grant Performance conditions and performance periods EPS growth performance condition TSR growth performance condition The number of rights that vest will be determined by reference to two performance conditions: • earnings per share (EPS) growth; and • total shareholder return (TSR) growth. Half of the rights granted are subject to the EPS growth performance condition (EPS Rights). The other half of the rights granted are subject to the TSR growth condition (TSR Rights). 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 from a base level of pro forma EPS in FY2020 (being 15.2 cents per share). This base level EPS was calculated by dividing the Company’s pro forma NPAT for the financial year ended 28 June 2020 (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 28 June 2020. Broadly, TSR is a measure of the increase in the Company’s share price (assuming dividends are reinvested). 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 $4.09 used as the base level. (This number was the volume weighted average price of the Company’s shares on ASX in the period 1 July 2020 to 30 September 2020). The compound annual growth rate in the Company’s TSR is measured at the end of the relevant performance period, having regard to the volume weighted average sale price on ASX of the Company’s shares (as determined by the Board) in the period from 1 July to 30 September 2023 (inclusive) or such other period as the Board considers appropriate. Performance periods The performance period ends after the conclusion of FY2023. If a performance right does not vest at the end of this performance period it lapses. There is no retesting. Vesting schedule • 30% of the EPS Rights will vest if the minimum EPS growth hurdle condition of 10% EPS CAGR is achieved; • 30% of the TSR Rights will vest if the minimum TSR growth hurdle condition of 10% TSR CAGR is achieved; • 100% of the EPS Rights will vest if the EPS • 100% of the TSR Rights will vest if the TSR growth hurdle of 20% EPS CAGR is achieved; and growth hurdle of 20% TSR CAGR is achieved; and • if the EPS CAGR is within the range of 10% • if the TSR CAGR is within the range of 10% to 20% EPS CAGR, the number of EPS Rights that will vest will be pro-rated on a straight- line basis for between 30% and 100% of the EPS Rights. to 20% TSR CAGR, the number of TSR Rights that will vest will be pro-rated on a straight- line basis for between 30% and 100% of the TSR Rights. 65 Baby Bunting Annual Report 2022Remuneration report continued Post-vesting disposal restriction Once the performance right has vested, the participant will have two years in which to exercise the vested right and be provided with a share. To ensure ongoing alignment with shareholders, any shares that are issued to a participant upon vesting and exercise of a right will be subject to a 12 months disposal restriction. 6.3.3 FY2019 to FY2022 performance rights grant (historical) During the 2020 financial year, the Board made a grant under the Long Term Incentive Plan for the period FY2019 to FY2022. This grant is referred to as the FY2019 to FY2022 grant. Under this grant, the Board granted 2,311,000 performance rights (in total) to the CEO and Managing Director, the Chief Financial Officer and six other participating executives. The grant to the CEO and Managing Director was approved by shareholders at the Company’s 2019 AGM. Terms and conditions of the FY2019 to FY2022 performance rights grant Performance conditions and performance periods EPS growth performance condition TSR growth performance condition The number of rights that vest will be determined by reference to two performance conditions: • earnings per share (EPS) growth; and • total shareholder return (TSR) growth. Half of the rights granted are subject to the EPS growth performance condition (EPS Rights). The other half of the rights granted are subject to the TSR growth condition (TSR Rights). 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 (calculated before the application of AASB 16) from a base level of pro forma EPS in FY2019 (being 12.0 cents per share – calculated before the application of AASB 16). This base level EPS was calculated by dividing the Company’s pro forma NPAT for the financial year ended 30 June 2019 (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 30 June 2019. Broadly, TSR is a measure of the increase in the Company’s share price (assuming dividends are reinvested). 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 $2.95 used as the base level. (This number was the volume weighted average price of the Company’s shares on ASX in the period 1 July 2019 to 30 September 2019). The compound annual growth rate in the Company’s TSR is measured at the end of the relevant performance period, having regard to the volume weighted average sale price on ASX of the Company’s shares (as determined by the Board) in the period from 1 July to 30 September 2022 (inclusive) or such other period as the Board considers appropriate. Performance periods The performance period ends after the conclusion of FY2022. If a performance right does not vest at the end of this performance period it lapses. There is no retesting. 66 Vesting schedule • 30% of the EPS Rights will vest if the minimum EPS growth hurdle condition of 10% EPS CAGR is achieved; • 30% of the TSR Rights will vest if the minimum TSR growth hurdle condition of 10% TSR CAGR is achieved; • 100% of the EPS Rights will vest if the EPS • 100% of the TSR Rights will vest if the TSR growth hurdle of 20% EPS CAGR is achieved; and growth hurdle of 20% TSR CAGR is achieved; and • if the EPS CAGR is within the range of 10% to • if the TSR CAGR is within the range of 10% to 20% EPS CAGR, the number of EPS Rights that will vest will be pro-rated on a straight- line basis for between 30% and 100% of the EPS Rights. 20% TSR CAGR, the number of TSR Rights that will vest will be pro-rated on a straight– line basis for between 30% and 100% of the TSR Rights. Post-vesting disposal restriction Once the performance right has vested, the participant will have two years in which to exercise the vested right and be provided with a share. To ensure ongoing alignment with shareholders, half of any shares that are issued to a participant upon vesting and exercise of a right will be subject to a 12 months disposal restriction. 6.3.4 FY2018 to FY2021 performance rights grant (historical) During the 2019 financial year, the Board made a grant under the Long Term Incentive Plan for the period FY2018 to FY2021. This grant is referred to as the FY2018 to FY2021 grant. Under this grant, the Board granted 2,704,000 performance rights (in total) to the CEO and Managing Director, the Chief Financial Officer and seven other participating executives (200,000 rights lapsed in a prior year). The grant to the CEO and Managing Director was approved by shareholders at the Company’s 2018 AGM. Terms and conditions of the FY2018 to FY2021 performance rights grant Performance conditions and performance periods EPS growth performance condition The number of rights that vest will be determined by reference to two performance conditions: • earnings per share (EPS) growth; and • total shareholder return (TSR) growth. Half of the rights granted are subject to the EPS growth performance condition (EPS Rights). The other half of the rights granted are subject to the TSR growth condition (TSR Rights). 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 (calculated before the application of AASB 16) from a base level of 7.6 cents per share. This base level EPS was calculated by dividing the Company’s pro forma NPAT (calculated before the application of AASB 16) for the financial year ended 24 June 2018 (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 24 June 2018. 67 Baby Bunting Annual Report 2022Remuneration report continued TSR growth performance condition Broadly, TSR is a measure of the increase in the Company’s share price (assuming dividends are reinvested). 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 $2.22 used as the base level. (This number was the volume weighted average price of the Company’s shares on ASX in the period 1 July 2018 to 30 September 2018). The compound annual growth rate in the Company’s TSR is measured at the end of the relevant performance period, having regard to the volume weighted average sale price on ASX of the Company’s shares (as determined by the Board) in the period from 1 July to 30 September 2021 (inclusive) or such other period as the Board considers appropriate. Performance periods The performance period ends after the conclusion of FY2021. If a performance right does not vest at the end of this performance period it lapses. There is no retesting. Vesting schedule • 30% of the EPS Rights will vest if the minimum EPS growth hurdle condition of 10% EPS CAGR is achieved; • 30% of the TSR Rights will vest if the minimum TSR growth hurdle condition of 10% TSR CAGR is achieved; • 100% of the EPS Rights will vest if the EPS • 100% of the TSR Rights will vest if the TSR growth hurdle of 25% EPS CAGR is achieved; and growth hurdle of 20% TSR CAGR is achieved; and • if the EPS CAGR is within the range of 10% to • if the TSR CAGR is within the range of 10% to 25% EPS CAGR, the number of EPS Rights that will vest will be pro-rated on a straight-line basis for between 30% and 100% of the EPS Rights. 20% TSR CAGR, the number of TSR Rights that will vest will be pro-rated on a straight-line basis for between 30% and 100% of the TSR Rights. LTI outcomes to date under the FY2018 to FY2021 grant In October 2021, the outstanding rights in relation to the FY2018 to FY2021 grant were assessed by the Board. As the performance conditions had been satisfied, the rights vested and were exercised and 2,504,000 new ordinary shares were issued in October 2021. Details of the assessment is below. TSR performance rights The TSR compound annual growth rate for the FY2018 to FY2021 grant TSR rights (being 1,252,000 rights) was assessed by reference to volume weighted average sale price on ASX of the Company’s shares in the period from 1 July 2021 to 30 September 2021. On this basis, the total shareholder return compound annual growth rate (including dividends reinvested) over the performance period was 39.3%. At this level, all of the outstanding TSR rights vested and were exercised by participants. 68 EPS performance rights For the FY2018 to FY2021 grant, the Board determined that EPS will be determined on the basis of pro forma NPAT for FY2021 and on the basis consistent with that used for reporting of the Company’s pro forma NPAT with two exceptions: pro forma NPAT included the $2.400 million settlement payment received from a vendor of certain digital assets (as other income) as well as the cost of the $2.774 million payment being a cash incentive payment relating to certain EPS rights (see Section 3.4 of the 2021 Remuneration Report). The compound annual growth rate in the Company’s EPS measured over the period from the end of the 2018 financial year to the end of 2021 financial year was 38.3%. On this basis, all of the outstanding EPS rights in the FY2018 to FY2021 grant, being 1,252,000 rights, vested and were exercised. A reconciliation between the EPS for FY2021 as used for the purposes of the Long Term Incentive Plan and statutory EPS is set out below: Pro forma NPAT Adjustments to Pro forma NPAT Settlement payment Cash settled LTI payment AASB15/16 - impact of accounting changes Adjusted Pro forma NPAT Shares on issue Shares to be issued in relation to EPS Adjusted Shares on issue Pro forma EPS CAGR EPS (on FY18) 6.3.5 FY2021 retention rights grant (historical) 2018 $’000 2021 $’000 9,607 26,004 NPAT Impact 1,607 (1,942) 684 26,353 125,980,596 129,255,075 1,252,000 125,980,596 130,507,075 0.0763 0.202 38.3% During the 2019 financial year, the Board made a one-off grant of retention rights to participating eligible executives, including the Chief Financial Officer. At the end of the financial year, there were 564,000 retention rights granted in total. The Chief Financial Officer received 165,000. The CEO and Managing Director was not granted retention rights. In July 2021, 530,000 retention rights vested and were exercised and 530,000 ordinary shares were subsequently issued. After this time, there were 34,000 outstanding retention rights held by one participant, with a relevant three year testing period that ended in March 2022. The Board determined that the performance condition was satisfied, and 34,000 ordinary shares were issued in April 2022. There are no outstanding retention rights. 69 Baby Bunting Annual Report 2022 Remuneration report continued 6.4. General comments on rights Calculation of vesting of EPS Rights In determining whether an EPS growth hurdle has been met, the Board has regard to the number of shares that are to be newly issued upon vesting of the EPS Rights. This has the effect of taking into account any dilution impact at the time of vesting. While reducing the number of EPS Rights that would otherwise vest, the Board considers this approach preferable as it reflects the dilution impact to shareholders arising where new shares are issued. For the FY2021 to FY2024 grant, and future grants, the Board will calculate EPS growth for EPS Rights taking account of the employee equity incentive expenses. This is an adjustment from the approach that applied before this time. The Company has always presented its earnings on a pro forma basis, in addition to on a statutory basis. The Directors consider that pro forma earnings are appropriate as they better represent the underlying financial performance of the business. One of the pro forma adjustments applied to show earnings is the exclusion of the non-cash impact of employee equity incentive expenses. While this expense will be excluded from the Company’s presentation of pro forma earnings, it will be included in pro forma earnings used to calculate EPS growth in the context of the Company’s Long Term Incentive Plan. The change has been chosen to ensure that the measure of EPS growth used has regard to the full impact of the accounting expense of employee equity incentives. This will ensure that earnings calculations for equity incentive purposes have regard to the accounting expense of those equity incentives. The denominator for EPS calculations is the weighted average number of ordinary shares during the year. Malus and clawback First introduced for the FY2020 to FY2023 grant, the terms of the Long Term Incentive Plan provide for malus to be applied to unvested awards and for clawback provision to be applied for vested awards. This is to ensure that in the event of serious misconduct or the identification of a serious adverse subsequent event, the relevant participant does not inappropriately benefit in those circumstances. Treatment on cessation of employment Upon resignation or in instances where a participant’s employment was terminated for cause or as a result of unsatisfactory performance, their 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 obtained at the 2021 annual general meeting and was expressed to be for the period up to the 2024 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. 70 6.5. 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. By providing share ownership to employees, Baby Bunting is committed to creating a high performance culture and aligning employees to the creation of long term value for the Company. The GES Plan provides for grants of shares to eligible employees of the Company up to a value determined by the Board. At the end of the financial year, just under 50% of the Company’s employees were shareholders of the Company (generally consistent with the prior year), the vast majority of whom acquired their shares because of the GES Plan. During the financial year, the Company made its seventh offer under this plan and issued 135,051 shares to 763 eligible employees who each received approximately $1,000 worth of Baby Bunting shares for no monetary consideration. Eligible employees are generally those full-time or part-time employees (or long term casual employees) who have been employed for approximately 12 months before the date of the offer. Directors, including the CEO and Managing Director, are not eligible to participate in this plan. To illustrate the benefits provided to participating team members under the GES Plan, an employee who has participated in each of the seven share offers under the GES Plan (since 2015) has received 2,559 Baby Bunting shares. This represents around $11,691 worth of value (using the share price at the end of the financial year and including the dividends that have been paid on those shares). Details of the seven employee share plan offers are below: First employee gift offer (October 2015) Second employee gift offer (September 2016) Third employee gift offer (October 2017) Fourth employee gift offer (October 2018) Fifth employee gift offer (October 2019) Sixth employee gift offer (October 2020) Seventh employee gift offer (October 2021) Aggregate value (including dividends) Value of shares offered Number of shares provided $1,000 $1,000 $1,000 $750 $1,000 $1,000 $1,000 $11,691 714 334 546 297 284 207 177 2,559 Note: value of shares determined using the volume weighted average share price at the time of the offer and, in the case of the total amount, using the share price on 24 June 2022. Cumulative dividends of $1,096.90 have been paid on the Gift Shares over the relevant period. 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). The Board intends making grants under the GES Plan in the future to eligible employees to reward sustainable financial performance. 71 Baby Bunting Annual Report 2022 Remuneration report continued 7. Non-executive Directors Remuneration Policy Under the Company’s Constitution, Non-executive Directors’ remuneration for their services as a Director 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). Non-executive Directors’ remuneration must not include a commission on, or a percentage of, operating revenue. Non-executive Directors are not entitled to participate in any of the Company’s employee incentive plans. Non- executive Directors may be reimbursed for travel and other reasonable expenses incurred on the business of the Company or in carrying out duties as a director. A director may be paid additional or special remuneration where a director performs extra services or makes special exertions. Non-executive Directors’ fees Similar to executive remuneration, the Committee undertakes reviews of Non-executive Director remuneration to ensure it is market competitive. A review was undertaken by the Committee in February 2022 with fees adjusted with effect on 1 February 2022. Prior to that, the last fee adjustment occurred on 1 January 2019. The per annum fees (inclusive of superannuation contributions provided by the Company) are set out below: Chair Non-executive Director Chair of a Board Committee Member of a Board Committee Fees before 1 February 2022 $ per annum Fees from 1 February 2022 $ per annum 135,000 80,000 15,000 7,500 200,000 100,000 15,000 – Recognising the expectation that Directors serve on Board Committees, no additional fees are provided for serving on one of the established Board Committees. For the financial year ended 26 June 2022, the fees paid and superannuation contributions to all Non-executive Directors were approximately $644,000 in aggregate. 72 d % e t a e r l e c n a m r o f r e P l 6 $ a t o T 5 $ t n e m y a p 4 $ n a p l h s a c e v i t n e c n i e r a h s m r e t g n o L e e y o p m E l n a P l I T L 3 $ s t h g r i e $ v a e l g n o L i e c v r e s - n o N - r e p u S n $ o i t a u n n a y r a t e n o m d n a I T S s $ t i f e n e b s $ e e f r e h t o y r a a S l 1 $ s e e f & r a e Y 2 t n e m y a p d e s a b - e r a h S s t i f e n e b m r e t g n o L t n e m y o p m e l m r e t t r o h S s t i f e n e b s t i f e n e b e e y o p m e l - t s o P i s r o t c e r D e v i t u c e x e - n o N . l e b a t g n w o i l l o f e h t n i t u o t e s e r a y n a p m o C e h t f o l e n n o s r e p t n e m e g a n a m y e k r e h t o d n a s r o t c e r D e v i t u c e x e - n o N e h t i f o n o i t a r e n u m e r e h t f o s l i a t e D i i l s e v i t u c e x E d e s o c s D d n a s r o t c e r D e v i t u c e x e - n o N r o f n o i t a r e n u m e r f o s l i a t e D . 8 - - - - - - - - - - - - - - % 9 6 6 . % 2 8 7 . % 0 8 6 . % 9 4 7 . , 1 8 8 4 5 1 0 0 5 2 0 1 , 1 0 0 3 0 1 , 0 0 0 5 9 , 0 0 5 2 9 , 0 0 5 , 7 8 4 8 8 2 0 1 , - 0 0 5 , 7 8 1 3 7 , 5 7 - 1 3 7 , 5 7 1 6 4 9 3 , 0 0 5 2 4 1 , 7 9 1 , 7 2 9 , 1 - - - - - - - - - - - - - - - , 6 1 0 3 2 4 , 1 - 2 0 0 , 1 3 7 , 1 9 0 9 , 1 1 4 , 7 6 6 0 7 7 , 2 , 5 2 3 3 3 0 , 1 , 2 0 4 4 9 9 3 , - - - - - - - - - - - - - - - - - - - 9 9 9 4 9 7 , 6 5 2 2 , 1 3 8 6 3 , 9 9 6 5 0 1 , 9 6 3 5 1 , - 9 0 7 , 9 7 5 , 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0 8 0 4 1 , 3 9 8 8 , 4 6 3 9 , 2 4 2 8 , 9 0 4 8 , 1 9 5 , 7 3 5 3 9 , 1 9 5 , 7 5 8 8 6 , - 5 8 8 6 , - 7 8 5 3 , 3 6 3 2 1 , - - - - - - - - - - - - - - , 2 8 9 8 8 2 , 1 3 5 5 2 2 , 8 6 5 3 2 , 9 6 8 , 7 - - - - - - - - - - - - - - - , 1 0 8 0 4 1 2 2 0 2 n o s l i i W e n a e M l 7 0 6 3 9 , 7 3 6 3 9 , 8 5 7 , 6 8 1 9 0 4 8 , 9 0 9 9 7 , 1 3 5 3 9 , 9 0 9 9 7 , 6 4 8 8 6 , - 1 2 0 2 2 2 0 2 1 2 0 2 i n v e L y r a G 2 2 0 2 l r e y a P a n n o D 1 2 0 2 2 2 0 2 1 2 0 2 2 2 0 2 1 2 0 2 i a r e r E e n c n a r F i ) 1 2 0 2 r e b m e t p e S 1 i d e t n o p p a ( t n e K y r a G 6 4 8 8 6 , 2 2 0 2 e h c o R n e h p e t S - 1 2 0 2 ) 1 2 0 2 r e b m e t p e S 1 i d e t n o p p a ( i r o t c e r D e v i t u c e x e - n o N r e m r o F 4 7 8 5 3 , 7 3 1 , 0 3 1 2 2 0 2 1 2 0 2 ) 1 2 0 2 r e b o t c O 5 d e r i t e R ( l l e n r o C n a I , 5 2 2 4 8 5 2 2 0 2 r e c n e p S t t a M s e v i t u c e x e d e s o c s D l i 9 8 8 , 7 1 9 3 4 5 2 1 , 4 9 6 , 1 2 6 4 5 0 1 , 0 1 6 4 1 2 , 0 6 0 0 6 5 , 1 2 0 2 2 1 8 , 7 6 9 8 7 2 4 1 , 9 9 7 , 3 3 7 0 8 2 4 1 , 8 6 5 3 2 , 4 9 6 , 1 2 0 0 5 , 7 0 0 5 , 7 0 4 8 0 5 1 , , 1 8 9 9 8 3 - , 8 5 8 9 0 4 2 2 0 2 n a m k e o H n r a D i , 9 6 6 6 1 0 5 , , 4 3 2 5 4 4 , 1 9 9 9 8 8 6 , 1 5 6 , 1 3 2 8 6 2 , 8 6 0 8 8 , 6 4 0 8 1 , 0 5 4 5 6 3 , , 1 6 3 0 2 4 , 1 . e g a p g n w o i l l o f e h t n o e r a s e t o N 73 1 2 0 2 2 2 0 2 1 2 0 2 L A T O T Baby Bunting Annual Report 2022 Remuneration report continued Notes: 1. Amount includes the value of annual leave accrued during the financial year and salary sacrifice arrangements. 2. The value of Share-based payments has been calculated in accordance with applicable accounting standards. 3. The value of the LTI plan rights included as remuneration in the table is an accounting value and represents the aggregate of amounts determined for both market based and non-market based performance hurdles. 4. The Company issued 135,051 shares under its General Employee Share Plan in the current reporting period with no monetary consideration payable by participating eligible employees who each received approximately $1,000 worth of shares. In the prior reporting period, the Company issued 165,221 shares under its General Employee Share Plan with no monetary consideration payment by participating eligible employees who each received approximately $1,000 worth of shares. 5. The cash incentive payment related to long term incentives for the period FY2016 to FY2020 and related to the 2021 financial year. 6. There were no termination benefits paid or payable during the current financial year. 9. 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. Ordinary shares Shares held by key management personnel, including close members of their family and entities related to them. Non-executive Directors Ian Cornell (retired on 5 October 2021)1 Melanie Wilson Gary Levin Donna Player Gary Kent Francine Ereira (appointed on 1 September 2021) Stephen Roche (appointed on 1 September 2021)2 Notes: 1. Year end balance is Ian Cornell’s shareholding on the date he retired. 2. Opening balance is Stephen Roche’s shareholding on the date he was appointed. Disclosed executives Matt Spencer Darin Hoekman 74 Balance at start of the year Balance at the end of the year Change 600,000 - 600,000 20,000 10,000 30,000 150,000 36,000 20,000 - - 150,000 36,000 4,000 24,000 — 4,110 4,110 35,000 — 35,000 Received upon vesting of performance rights Balance at start of the year Sale of shares Balance at end of the year 1,232,989 600,000 (605,400) 1,227,589 2,272 565,000 (166,484) 400,788 Performance rights granted to disclosed executives Balance at start of the year 600,000 533,000 480,000 Number of rights granted as compensation during the year Value of rights granted during the year Number of rights exercised during the year Value of the rights exercised during the year Number of rights lapsed during the year Number of rights held at end of year (all unvested) Fair value per right at grant date — — — — — — — — — 600,000 $918,000 — — — — — — — 185,000 $3.46 $639,730 165,0002 400,000 374,500 350,000 — — — — — — — — — 175,000 $3.46 $605,150 — 165,000 $382,800 — — — 400,000 $612,000 — — — — — — — — — — — — — — — — 533,000 480,000 185,000 — — 374,500 350,000 175,000 Disclosed executives Matt Spencer FY2018 to FY2021 rights FY2019 to FY2022 rights FY2020 to FY2023 rights FY2021 to FY2024 rights1 Darin Hoekman Retention rights (FY2021) FY2018 to FY2021 rights FY2019 to FY2022 rights FY2020 to FY2023 rights FY2021 to FY2024 rights1 Notes: 1. In respect of the FY2021 to FY2024 rights, Matt Spencer was granted performance rights pursuant to shareholder approval granted at the 2021 AGM on 5 October 2021. During the year, Darin Hoekman was granted the rights detailed above on 23 November 2021. 2. Darin Hoekman’s retention rights vested in July 2021 after the end of the 2021 financial year and were exercised in August 2021. Details of the performance conditions and performance periods for those rights are set out in Section 6.3 (Long term incentive plan) above. Options There are no options over shares on issue as at the date of this Directors’ Report. 75 Baby Bunting Annual Report 2022 Remuneration report continued 10. 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. Disclosed executives Termination by notice Termination – notice by Company or payment in lieu Matt Spencer Darin Hoekman 12 months 6 months 12 months 6 months 11. Other KMP disclosures Other than as disclosed in this Remuneration Report, no member of the Company’s key management personnel (or their respective close family members or an entity over which they have control or significant influence) has entered into any transaction with the Company or a subsidiary during the reporting period, other than transactions that occur within a normal employee, customer or supplier relationship, on arms-length terms and that are trivial or domestic in nature. There are no loans to key management personnel. This is the end of the Remuneration Report. 76 Auditor’s independence declaration 77 A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationErnst & Young8 Exhibition Street Melbourne VIC 3000 AustraliaGPO Box 67 Melbourne VIC 3001Tel: +61 3 9288 8000Fax: +61 3 8650 7777ey.com/auAuditor’s Independence Declaration to the Directors of Baby BuntingGroup LimitedAs lead auditor for the audit of Baby Bunting Group Limited for the financial year ended 26June2022, I declare to the best of my knowledge and belief, there have been:(a)no contraventions of the auditor independence requirements of the Corporations Act 2001 inrelation to the audit;(b)no contraventions of any applicable code of professional conduct in relation to the audit; and(c)No non-audit services provided that contravene any applicable code of professional conduct in relation to the audit.This declaration is in respect of Baby Bunting Group Limited and the entities it controlled during the financial year.Ernst & YoungTony MorsePartner12 August 2022Baby Bunting Annual Report 2022Financial report for the year ended 26 June 2022 Contents Auditor’s independence declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income 77 79 80 Consolidated Statement of Financial Position 81 Consolidated Statement of Changes in Equity 82 Consolidated Statement of Cash Flows 83 Note 1: Reporting entity Note 2: Summary of significant accounting policies Notes to the Consolidated Financial Statements 83 83 99 Note 3: Revenue from contracts with customers 99 Note 4: Other operating income 99 Note 5: Profit for the year 101 Note 6: Income tax 101 Note 7: Other receivables 102 Note 8: Inventory 102 Note 9: Other assets 102 Note 10: Plant and equipment 103 Note 11: Intangible assets and goodwill 104 Note 12: Leases 106 Note 13: Deferred tax assets 107 Note 14: Payables 107 Note 15: Other liabilities 108 Note 16: Loans and borrowings 108 Note 17: Provisions 109 Note 18: Issued capital 109 Note 19: Dividends 110 Note 20: Retained earnings 110 Note 21: Segment information 111 114 Note 23: Related party transactions 114 Note 24: Commitments for expenditure 114 Note 25: Financial instruments – Fair values and risk management 119 Note 26: Notes to the statement of cash flows 120 Note 27: Parent entity disclosures 121 Note 28: Group entities 122 Note 29: Earnings per share 123 Note 30: Remuneration of auditors 123 Note 31: Events after balance sheet date Note 22: Reserves 124 Directors’ Declaration 125 Independent Auditor’s Report 78 Consolidated Statement of Profit or Loss and Other Comprehensive Income for the 52 weeks ended 26 June 2022 Revenue Cost of sales Gross profit Other operating income Store expenses Marketing expenses Warehousing expenses Administrative expenses Transformation project expenses Finance expenses Profit before tax Income tax expense Profit after tax Other comprehensive income Other comprehensive income that may be reclassified to profit or loss in subsequent periods: Exchange differences on translation of foreign operations Net gain/(loss) on cash flow hedges Income tax effect relating to the components of OCI Net other comprehensive gain/(loss) that may be reclassified to profit or loss in subsequent periods Net other comprehensive income/(loss) for the year, net of tax Note 3 4 5 5 5 5 5 6 25 13 2022 $’000 2021 $’000 Restated1 507,274 468,377 (311,512) (294,711) 195,762 173,666 - 2,466 (97,397) (90,522) (8,226) (7,044) (9,529) (6,552) (40,653) (35,495) (4,668) (8,317) (6,987) (5,650) 28,302 22,552 (8,781) (5,513) 19,521 17,039 24 407 (122) 309 309 - - - - - Total comprehensive income for the year, net of tax 19,830 17,039 Profit for the year attributable to: Equity holders of Baby Bunting Group Limited 19,521 17,039 Total comprehensive income attributable to: Equity holders of Baby Bunting Group Limited 19,830 17,039 Earnings per share From continuing operations Basic (cents per share) Diluted (cents per share) 29(a) 29(b) 14.9 14.3 13.2 12.6 Notes to the consolidated financial statements are included in pages 83 to 123. 1. Refer to Note 2(aa) for detailed information on restatement of comparative in the Financial Statements for the period ended 26 June 2022. 79 Baby Bunting Annual Report 2022Consolidated Statement of Financial Position as at 26 June 2022 Current Assets Cash and cash equivalents Other receivables Inventories Current tax assets Other financial assets Other assets Total Current Assets Non-Current Assets Plant and equipment Intangibles Goodwill Right of use asset Deferred tax assets Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Other liabilities Current tax liabilities Lease liability Provisions Total Current Liabilities Non-Current Liabilities Borrowings Lease liability Provisions Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued capital Reserves Retained earnings Total Equity Note 26 Jun 2022 $’000 27 Jun 2021 $’000 Restated1 26(b) 7 8 25 9 10 11 11 12 13 14 15 12 17 16 12 17 18 22 20 12,238 5,303 96,667 - 407 10,884 5,916 79,987 1,143 - 5,138 3,613 119,753 101,543 30,316 5,304 45,321 27,229 1,940 45,321 139,838 112,058 10,137 11,692 230,916 198,240 350,669 299,783 52,555 5,785 585 29,550 6,537 48,812 3,163 - 25,521 5,804 95,012 83,300 12,946 126,682 1,308 9,950 99,768 691 140,936 110,409 235,948 193,709 114,721 106,074 87,913 17,378 9,430 87,153 13,149 5,772 114,721 106,074 Notes to the consolidated financial statements are included in pages 83 to 123. 1. Refer to Note 2(aa) for detailed information on restatement of comparative in the Financial Statements for the period ended 26 June 2022. 80 Consolidated Statement of Changes in Equity for the year ended 26 June 2022 Share- based Payments Reserve $’000 Share- based Payment Tax Reserve $’000 Cash Flow Hedge Reserve $’000 Foreign Currency Translation Reserve $’000 Retained Earnings $’000 Restated1 Issued Capital $’000 Total Equity $’000 Balance at 28 June 2020 86,358 4,380 - - 86,358 4,380 - - - - - - Adjustment for change in accounting policy (Note 2(aa)) Balance as at 28 June 2020 (restated) Profit for the period Other comprehensive income Total comprehensive income for the period Issue of shares (Note 18) 795 Dividends (Note 19) Share-based payment expense (Note 22) Tax effect of share-based payments (Note 22) Transfer to retained earnings (Note 22) - - - - Balance at 27 June 2021 (restated) Profit for the period Other comprehensive income Total comprehensive income for the period Issue of shares (Note 18) 760 Dividends (Note 19) Share-based payment expense (Note 22) Tax effect of share-based payments (Note 22) Transfer to retained earnings (Note 22) - - - - - - - - - - - - - 7,150 (2,955) - - - - - 4,574 - - - - - - - 6,828 - - - - - - - - 741 (3,649) - - - - - - - - - - - - - 285 285 - - - - - - - - - - - - - - - - - - 24 24 - - - - - 2,631 93,369 (1,192) (1,192) 1,439 92,177 17,039 17,039 - - 17,039 17,039 - 795 (15,661) (15,661) - - 4,574 7,150 2,955 - 5,772 106,074 5,772 106,074 19,521 19,521 - 309 19,521 19,830 - 760 (19,512) (19,512) - - 3,649 6,828 741 - Balance at 27 June 2021 87,153 8,954 4,195 87,153 8,954 4,195 Balance at 26 June 2022 87,913 15,782 1,287 285 24 9,430 114,721 Notes to the consolidated financial statements are included in pages 83 to 123. 1. Refer to Note 2(aa) for detailed information on restatement of comparative in the Financial Statements for the period ended 26 June 2022. 81 Baby Bunting Annual Report 2022Consolidated Statement of Cash Flows for the 52 weeks ended 26 June 2022 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Income tax paid Interest received Finance costs paid 2022 $’000 2021 $’000 Restated1 Note 560,740 515,670 (496,476) (469,246) (4,884) (5,307) - - (7,015) (5,448) Net cash from operating activities 26(a) 52,365 35,669 Cash flows from investing activities Payments for plant and equipment Payments for intangibles Net cash used in investing activities Cash flows from financing activities Dividends paid Net borrowings/(repayment) Payments of principal portion of lease liability Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period 10 11 (8,746) (10,816) (3,873) (44) (12,619) (10,860) 19 (19,512) (15,661) 2,996 9,950 (21,876) (21,551) (38,392) (27,262) 1,354 10,884 12,238 (2,453) 13,337 10,884 Cash and cash equivalents at end of the period 26(b) Notes to the consolidated financial statements are included in pages 83 to 123. 1. Refer to Note 2(aa) for detailed information on restatement of comparative in the Financial Statements for the period ended 26 June 2022. 82 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 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 153 National Drive, Dandenong South, Victoria 3175, Australia. The consolidated financial statements of the Company as at and for the year ended 26 June 2022 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’. The Company has adopted a 52 week retail calendar for financial reporting purposes which ended 26 June 2022. The prior year was a 52 week retail calendar ending on 27 June 2021. Note 2: Summary of 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 Statements, the Company is a for-profit entity. The financial statements were authorised for issue by the directors on 12 August 2022. b. Basis of Preparation The consolidated financial statements have been prepared on the basis of historical cost, except for certain financial assets measured at fair value, 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 value of the consideration given in exchange for goods and services. 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, other financial instruments such as forward currency contracts that are within the scope of AASB 9 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 instrument 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 Company is 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. 83 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued 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. Determination of inventory provision for shrinkage, obsolescence and mark-down The Company’s judgement is applied in determining the inventory provision for shrinkage, obsolescence and mark-down. Estimates of shrinkage trends based on historical observations have been applied against inventory held at year end and where the estimated selling price of inventory including the costs necessary to sell is lower than the cost to sell, the difference is recognised in the provision for obsolescence. 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 estimates the future cash flows expected to arise from the cash generating unit and a pre-tax 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 (2021: 3.0%) Terminal sales growth rate Forecasted gross margin Forecasted retail store expenses 3.0% (2021: 3.0%) Average gross margin achieved in the period immediately before the forecast period Forecast increases correlate to the consumer price index. The values assigned to the key assumption are consistent with external sources of information Pre-tax weighted average cost of capital 13.78% (2021: 12.05%) The pre-tax weighted average cost of capital (WACC) calculated for the current period includes consideration of lease liabilities as part of the capital structure when determining debt/equity assumptions in the WACC. Goodwill is allocated to Baby Bunting Group Limited, as a group of cash generating units’ for the purpose of impairment testing. The recoverable amount of the consolidated entity’s CGU to which goodwill is allocated currently exceeds its carrying value. Reasonably possible changes that may occur to the assumptions used would not result in impairment. Lease term of contracts with renewal options and incremental borrowing rate for leases Refer to Note 2(y) for significant judgements required for lease term of contracts with renewal options and determining the incremental borrowing rate for leases. 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. 84 When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in 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. Fair value measurement The Company measures financial instruments such as derivatives at fair value at each balance sheet date. 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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • in the principal market for the asset or liability; or • in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefit by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statement are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosure, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. f. Business combinations Business combinations are accounted for using the purchase acquisition 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. 85 Baby Bunting Annual Report 2022Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued g. Income 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 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. 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. 86 Deferred tax is recognised on share-based payments for the tax deduction that will be available to the Company on vesting of the LTI share-based payment plan. The deferred tax measurement is based on the share price at reporting date. The income tax benefit is recognised through income tax expense up to the amount relating to the cumulative share-based payment expense. Any tax benefit in excess of the amount relating to the cumulative share-based payment expense is recognised in the share-based payment tax reserve within equity. Refer to Note 22. h. Inventories 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 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. Volume rebates are recognised as a reduction in the cost of inventory and are recorded as a reduction in the cost of goods sold when the inventory is sold. Supplier promotional and marketing rebates that arise upon sale of inventory have been brought to account as a direct deduction in costs of goods sold. i. 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 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 Plant and equipment Useful Life 3 - 10 years Leasehold improvements 5 - 10 years j. Intangibles – computer software Intangible assets with finite lives that are acquired separately or internally generated 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. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. Class of intangible asset Computer software Useful Life 5 years k. Employee benefits Short-term employee benefits liabilities recognised for salaries and wages, annual leave and any other short term employee benefits that are expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are measured at the amounts expected to be paid when the liabilities are settled in respect of services provided by employees up to the reporting date. Long-term employee benefits liabilities recognised in respect of long service leave and any other long term employee benefits that are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are measured at the present value of the estimated future cash outflows to be made by the Company in respect of services provided by employees up to the reporting date. Consideration is given to expected future salary levels, historical employee turnover rates and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 87 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued l. 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. All receivables from EFT, credit card and debit card point of sales transactions during the period are classified as cash and cash equivalents. m. Revenue from contracts with customers Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This is generally instore when the customer purchases the goods or services, on delivery to the customer for online sales and on customer pickup for click and collect. For layby, revenue is recognised when customers make the final payment and goods have been collected. The initial layby deposit paid and subsequent instalment payments are recorded as unearned income in the balance sheet and included in sundry payables. Rights of return Certain contracts provide a customer with a right to return the goods within a specified period. The Company uses the expected value method (historical return rates provide a basis for the expected value) to estimate the goods that will not be returned because this method best predicts the amount of variable consideration to which the Company will be entitled. The requirements in AASB 15 Revenue from Contracts with Customers on constraining estimates of variable consideration are also applied in order to determine the amount of variable consideration that can be included in the transaction price. For goods that are expected to be returned, instead of revenue, the Company recognises a refund liability. A right of return asset (and corresponding adjustment to cost of sales) is also recognised for the right to recover products from a customer and recorded at cost value. Contract assets A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Company performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional. Contract liabilities A contract liability is the obligation to transfer goods or services to a customer for which the Company has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Company transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Company performs under the contract. The Company operates a loyalty program. Customers receive a loyalty voucher upon joining the Company’s loyalty program, Baby Bunting family. In addition, under the loyalty program, the Company offers loyalty vouchers when the cumulative spend reaches a specified amount. The loyalty vouchers can be redeemed in store or online for future purchases. Loyalty vouchers are expected to be redeemed within 30 days. The Company estimates the fair value of the un-issued loyalty vouchers based on the cumulative spend balance relative to the specified amount. The Company estimates the “breakage” rate based on redemption history and expiry dates of the issued loyalty vouchers. The Company records the contract liability based on the breakage rate for unspent and unexpired vouchers and un-issued vouchers. Refer to Note 15. n. 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. 88 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, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss. 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. The most applicable category for the Company is amortised cost and fair value through OCI. Financial assets at amortised cost (debt instruments) The Company measures financial assets at amortised cost if both of the following conditions are met: • the financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding; and • financial assets at amortised cost are subsequently measured using the effective interest rate method (EIR) and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The Company’s financial assets at amortised cost includes trade and other receivables and cash and cash equivalents. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Company’s consolidated statement of financial position) when: • the rights to receive cash flows from the asset have expired; or • the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. q. Derivative financial instruments and hedge accounting Initial recognition and subsequent measurement The Company uses derivative financial instruments, such as forward currency contracts, to hedge its foreign currency risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. 89 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued For the purpose of hedge accounting, hedges are classified as: – Fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment – Cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment – Hedges of a net investment in a foreign operation At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Company will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined). A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: – There is “an economic relationship” between the hedged item and the hedging instrument. – The effect of credit risk does not “dominate the value changes” that result from that economic relationship. – The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Company actually hedges and the quantity of the hedging instrument that the Company actually uses to hedge that quantity of hedged item. Hedges that meet all the qualifying criteria for hedge accounting are accounted for, as described below: Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised in OCI in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the statement of profit or loss. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. The Company uses forward currency contracts as hedges of its exposure to foreign currency risk in forecast transactions. The ineffective portion relating to foreign currency contracts is recognised as other expense. The amounts accumulated in OCI are accounted for, depending on the nature of the underlying hedged transaction. If the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is removed from the separate component of equity and included in the initial cost or other carrying amount of the hedged asset or liability. This is not a reclassification adjustment and will not be recognised in OCI for the period. For any other cash flow hedges, the amount accumulated in OCI is reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss. If cash flow hedge accounting is discontinued, the amount that has been accumulated in OCI must remain in accumulated OCI if the hedged future cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit or loss as a reclassification adjustment. After discontinuation, once the hedged cash flow occurs, any amount remaining in accumulated OCI must be accounted for depending on the nature of the underlying transaction as described above. r. 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. s. Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 90 The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Warranties Provisions for the expected cost of warranty obligations under applicable consumer law are recognised at the date of sale of the relevant products, at the directors’ best estimate of the expenditure required to settle the Company’s obligation. t. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Company’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Loans and borrowings After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate (EIR) method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. u. Borrowing costs Borrowing costs are recognised as expenses using the effective interest rate method as described below. 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 EIR method. v. Share-based payment arrangements Employees (including senior executives) of the Company receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity settled transactions). 91 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Equity-settled transactions The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model, further details of which are given in Note 22. The cost is recognised as employee benefit expense, together with a corresponding increase in equity (share-based payment reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 22(b). No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market condition, the transactions are treated as vested irrespective of whether the market condition is satisfied, provided that all other performance and/or service conditions are satisfied. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (further details are given in Note 29). w. Comparative amounts The comparative figures are for the period 29 June 2020 to 27 June 2021. Where appropriate, comparative information has been reformatted to allow comparison with current year information. x. Impairment of non-financial assets The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment for non-financial assets other than goodwill, the Company bases its impairment calculation on most recent budgets and projection calculations, which are prepared separately for each of the Company’s CGUs. Intangible assets not yet available for use are tested for impairment annually at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. y. Leases The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract coveys the right to control the use of an identified asset for a period of time in exchange for consideration. Company as a lessee The Company applies a single recognition and measurement approach for all leases, except for short-term leases and lease of low-value assets. The Company recognises lease liabilities to make lease payments and right-of-use assets representing the right of use of the underlying assets. 92 Right-of-use assets The Company recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows: • Property 5 to 12 years • Motor vehicles and material handling equipment 1 to 6 years The right-of-use assets are also subject to impairment. Refer to the accounting policies in section (x) Impairment of non-financial assets. Lease liabilities At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. Variable lease payments that do not depend on an index or a rate are recognised as expenses in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. Short-term leases and leases of low-value assets The Company applies the short-term lease recognition exemption to its short-term leases of material handling equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value. Lease payments on short-term leases and leases of low value assets are recognised as expense on a straight-line basis over the lease term. Significant judgement is required in determining the lease term of contracts with renewal options The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised. The Company has the option, under some of its leases, to lease the assets for additional terms of mostly five year options. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (i.e. a change in business strategy). Significant judgement in determining the incremental borrowing rate for each lease The Company calculates the incremental borrowing rate for each lease determined using inputs including the Company’s three-year multi option facility lending margin (adjusted for tenure) and the government bond rate applicable at the time of entering into the lease if the interest rate implicit in the lease is not readily determinable. z. Capital management For the purpose of the Company’s capital management, capital includes issued capital, borrowings and all other equity reserve attributable to the equity holder of the parent. The primary objective of the Company’s capital management is to maximise the shareholder value. 93 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued The Company manages its capital structure and make adjustments in light of changes in economic conditions and the requirements of the financial covenants. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Company’s has a dividend payout ratio of approximately 70% of full year pro forma NPAT. aa. Changes in accounting policies and disclosures New and amended standards and interpretations Changes in accounting policies - IFRIC agenda decision – Configuration or Customisation Costs in a Cloud Computing Arrangement In April 2021, the IFRS Interpretations Committee (IFRIC) published an agenda decision for configuration and customisation costs incurred related to a Software as a Service (SaaS) arrangement. The Company has changed its accounting policy in relation to configuration and customisation costs incurred in implementing SaaS arrangements. The nature and effect of the changes as a result of changing this policy is described below. Accounting policy - Software-as-a-Service (SaaS) arrangements SaaS arrangements are arrangements in which the Company does not currently control the underlying software used in the arrangement. Where costs incurred to configure or customise SaaS arrangements result in the creation of a resource which is identifiable, and where the Company has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits, such costs are recognised as a separate intangible software asset and amortised over the useful life of the software on a straight-line basis. The amortisation is reviewed at least at the end of each reporting period and any changes are treated as changes in accounting estimates. Where costs incurred to configure or customise do not result in the recognition of an intangible software asset, then those costs that provide the Company with a distinct service (in addition to the SaaS access) are now recognised as expenses when the supplier provides the services. When such costs incurred do not provide a distinct service, the costs are now recognised as expenses over the duration of the SaaS contract. Previously some costs had been capitalised and amortised over its useful life. Accounting estimates and judgements In the process of applying the Company’s accounting policy, management has made following judgements which have the most significant effect on the amounts recognised in the consolidated financial statements. For the current year, $0.924 million (pre-tax) of costs that would previously have been capitalised (under previous policy) were expensed. Basic EPS and diluted EPS were both lowered by 0.7 cents as a result. Cash outflows of $0.924 million were included in payments to suppliers and employees in the Consolidated Statement of Cash Flows that previously would have been included as payment to acquire intangible assets. • Determining whether cloud computing arrangements contain a software licence intangible asset The Company evaluates cloud computing arrangements to determine if it provides a resource that the Company can control. The Company determines that a software licence intangible asset exists in a cloud computing arrangement when both of the following are met at the inception of the arrangement: – The Company has the contractual right to take possession of the software during the hosting period without significant penalty. – It is feasible for the Company to run the software on its own hardware or contract with another party unrelated to the supplier to host the software. • Capitalisation of configuration and customisation costs in SaaS arrangements Where the Company incurs costs to configure or customise SaaS arrangements and such costs are considered to enhance current on-premise software or provide code that can be used by the Company in other arrangements, the Company applies judgement to assess whether such costs result in the creation of an intangible asset that meets the definition and recognition criteria in AASB 138 Intangible Assets. For the year ended 26 June 2022, $0.195 million (27 June 2021: $0.446 million) of costs incurred in implementing SaaS arrangements were recognised as intangible assets. 94 • Determination whether configuration and customisation costs provide a distinct service to access to the SaaS The Company applies judgement in determining whether costs incurred provide a distinct service, aside from access to the SaaS. Where it is determined that no distinct service is identifiable, the related costs are recognised as expenses over the duration of the service contract. Impact of change in accounting policy The change in policy has been retrospectively applied and comparative financial information has been restated, as follows: Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 27 June 2021 Revenue Cost of sales Gross profit Other operating income Store expenses Marketing expenses Warehousing expenses Administrative expenses Project expenses Finance expenses Profit before tax Income tax expense Profit after tax Other comprehensive income for the period Total comprehensive income for the period Profit for the period attributable to: Equity holders of Baby Bunting Group Limited Earnings per share From continuing operations Basic (cents per share) Diluted (cents per share) Restated $’000 As previously reported $’000 Increase/ (decrease) $’000 468,377 468,377 (294,711) (294,711) 173,666 173,666 2,466 2,466 (90,522) (90,520) (7,044) (7,044) (6,552) (6,552) (35,495) (35,535) (8,317) (7,574) (5,650) (5,650) 22,552 23,257 (5,513) (5,725) 17,039 17,532 - - - - 2 - - (40) 743 - (705) (212) (493) - - - 17,039 17,532 (493) 17,039 17,532 (493) 13.2 12.6 13.6 13.0 (0.4) (0.4) 95 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Consolidated Statement of Financial Position as at 27 June 2021: Current assets Cash and cash equivalents Other receivables Inventories Current tax assets Other assets Total current assets Non-current assets Plant and equipment Intangibles Goodwill Right of use asset Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Other liabilities Current tax liabilities Lease liabilities Provisions Total current liabilities Non-current liabilities Borrowings Lease liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 96 Restated $’000 As previously reported $’000 Increase/ (decrease) $’000 10,884 5,916 79,987 1,143 3,613 10,884 5,916 79,987 1,056 3,019 101,543 100,862 27,229 1,940 45,321 27,229 4,430 45,321 112,058 112,058 11,692 11,568 - - - 87 594 681 - (2,490) - - 124 198,240 200,606 299,783 301,468 (2,366) (1,685) 48,812 3,163 - 25,521 5,804 48,812 3,163 - 25,521 5,804 83,300 83,300 9,950 99,768 691 9,950 99,768 691 110,409 110,409 193,709 193,709 - - - - - - - - - - - 106,074 107,759 (1,685) 87,153 13,149 5,772 87,153 13,149 7,457 106,074 107,759 - - (1,685) (1,685) Consolidated Statement of Financial Position as at 28 June 2020: Current assets Cash and cash equivalents Other receivables Inventories Other assets Total current assets Non-current assets Plant and equipment Intangibles Goodwill Right of use asset Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Other liabilities Current tax liabilities Lease liabilities Provisions Total current liabilities Non-current liabilities Borrowings Lease liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Restated $’000 As previously reported $’000 Increase/ (decrease) $’000 13,337 5,122 13,337 5,122 65,094 65,094 2,742 2,516 86,295 86,069 22,482 22,482 2,272 45,321 3,690 45,321 93,504 93,504 7,195 7,195 - - - 226 226 - (1,418) - - - 170,774 172,192 257,069 258,261 (1,418) (1,192) 49,950 49,950 1,957 1,305 1,957 1,305 24,895 24,895 5,137 5,137 83,244 83,244 - - 81,083 81,083 565 565 81,648 81,648 164,892 164,892 - - - - - - - - - - - 92,177 93,369 (1,192) 86,358 86,358 4,380 1,439 4,380 2,631 92,177 93,369 - - (1,192) (1,192) 97 Baby Bunting Annual Report 2022Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Consolidated Statement of Cash Flows for the year ended 27 June 2021: Cash flows from operating activities Receipts from customers Payments to suppliers and employees Income tax paid Interest received Finance costs paid Restated $’000 As previously reported $’000 Increase/ (decrease) $’000 515,670 515,670 - (469,246) (467,999) 1,247 (5,307) (5,307) - - (5,448) (5,448) - - - Net cash from/(used in) operating activities 35,669 36,916 1,247 Cash flows from investing activities Payments for plant and equipment Payments for intangibles Net cash used in investing activities Cash flows from financing activities Dividends paid Net borrowings/(repayments) Payments of principal portion of lease liability Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period (10,816) (10,816) (44) (1,291) (10,860) (12,107) - (1,247) (1,247) (15,661) (15,661) 9,950 9,950 (21,551) (21,551) (27,262) (27,262) (2,453) (2,453) 13,337 10,884 13,337 10,884 - - - - - - - The following new and amended Australian Accounting Standards and AASB interpretations apply for the first time during the period ended 26 June 2022. The impact of these new standards and amendments were not material to the consolidated financial statements of the Company. Reference Title AASB 2020-8 Amendments to AASs – Interest Rate Benchmark Reform – Phase 2 Application 28 June 2021 AASB 2021-3 Amendments to AASs – COVID-19-Related Rent Concession beyond 30 June 2021 28 June 2021 Other Australian accounting standards and interpretations that have recently been issued or amended but are not yet effective have not been adopted by the consolidated entity for the reporting period ended 26 June 2022. 98 Note 3: Revenue from contracts with customers An analysis of the consolidated entity’s revenue for the year, is as follows: Revenue from contracts with customersi 507,274 468,377 i. Revenue from contracts with customers includes online revenue (including click & collect) $112.681 million (2021: $90.760 million). Note 4: Other operating income 2022 $’000 2021 $’000 Interest income Other incomei Gain on derivative instruments at fair value through profit or lossii 2022 $’000 - - - - 2021 $’000 - 2,400 66 2,466 i. The Company received a cash settlement payment in FY2021 ($2.400 million) from the vendor of certain digital commerce technology assets that were impaired in FY2020 following a dispute in relation to the performance of those assets. ii. The Company entered into foreign exchange forward contracts in FY2021 for inventory purchases that settled in foreign currency. The Company measures the derivative instrument at fair value through profit or loss and recorded a gain of $0.066 million in FY2021. In the current year, the Company measures the derivative assets through other comprehensive income. Refer to Note 25 Financial instruments. Note 5: Profit for the year Profit before income tax expense includes the following expenses: Interest and finance charges paid/payable Interest on lease liabilities Interest on borrowings Depreciation and amortisation Depreciation on right of use assets Employee benefits expense Depreciation and amortisation 2022 $’000 2021 $’000 Restated1 6,102 885 6,168 4,729 921 6,323 25,595 22,308 91,673 84,038 Depreciation and amortisation is disclosed in the Consolidated Statement of Profit or Loss and Other Comprehensive Income under “Store expenses”, “Warehousing expenses”, “Administrative expenses” and “Transformation project expenses” as detailed below: 99 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued For the year ended 26 June 2022 Store expenses Warehousing expenses Administrative expenses Transformation project expenses Total For the year ended 27 June 2021 Restated Store expenses Warehousing expenses Administrative expenses Transformation project expenses Total Project expenses include the following: Project related expensesi,ii Depreciation and amortisation on PPE and Intangibles $’000 Depreciation on Right of use Asset $’000 Excluding Depreciation and amortisation $’000 As reported $’000 (97,397) 4,950 23,022 (69,425) (9,529) (40,653) (4,668) 171 1,047 - 2,396 (6,962) 167 10 (39,439) (4,658) (152,247) 6,168 25,595 (120,484) Depreciation and amortisation on PPE and Intangibles $’000 Depreciation on Right of use Asset $’000 Excluding Depreciation and Amortisation $’000 As reported $’000 (90,522) 4,819 21,059 (64,644) (6,552) (35,495) (8,317) 163 625 716 964 95 190 (5,425) (34,775) (7,411) (140,886) 6,323 22,308 (112,255) 2022 $’000 2021 $’000 Restated1 4,668 8,317 i. The Company is currently undertaking a process of assessment and when necessary, replacement of its core information technology systems. During the year, the Company incurred ($3.242 million) non-capital costs associated with the implementation of an order fulfilment system, Loyalty system, People systems and digital technology assets. ii. Other transformation project expenses ($1.426 million) include external consultant costs associated with project management to deliver the transformation projects. The non-capital cost of external consultants associated with running the selection and planning for the integration of the new systems are not related to the day-to-day operations or financial performance of the business. These projects costs cease at project completion. Other expenses Other expensesi 2022 $’000 2021 $’000 - 1,091 i. During 1H FY21, the Company responded to an interception of insects founds in packaging of goods in an imported shipping container. Working closely with the Federal Department of Agriculture, Water and the Environment, the Company implemented a number of actions in accordance with Department requirements, including the treatment of all store rooms where the affected stock was held and the Distribution Centre and fumigation of some inventory. This resulted in some short term increases to supply chain costs and one-off costs of treatment and fumigation costs and customer remediation costs. These issues have now been resolved. Around 50% of costs associated with this incident were recovered through its insurance policies in 2HFY21 and $1.091 million is total costs incurred net of insurance recovery. Other expenses are included in Administrative expenses. 100 Note 6: Income tax Current tax in respect of the current year Current tax in respect of the prior year Deferred tax Total tax expense 2022 $’000 9,499 - (718) 8,781 2021 $’000 Restated1 5,281 410 (178) 5,513 The 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% (2021: 30%) Non-deductible expenditure Over/under from prior year Share-based payments Income tax expense recognised in profit or loss 2022 $’000 2021 $’000 Restated1 28,302 22,552 (8,491) (6,766) (36) - (254) (24) 410 867 (8,781) (5,513) The tax rate used for financial year 2022 and 2021 in the above reconciliation is the corporate tax rate of 30% payable by large Australian corporate entities on taxable profits under Australian tax law. Note 7: Other receivables Current Trade receivables Other receivables 2022 $’000 2021 $’000 177 5,126 5,303 219 5,697 5,916 There are no material receivables past due date. The receivables are expected to be settled within 30-90 days, subject to the terms of the relevant agreement. 101 Baby Bunting Annual Report 2022Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Note 8: Inventory Finished goods Less: Provision for shrinkage, obsolescence and mark-down 2022 $’000 2021 $’000 97,461 80,961 (794) (974) 96,667 79,987 The cost of inventories recognised as an expense during the current reporting period in respect of continuing operations was $311.512 million (2021: $294.711 million). During the financial year, there was a reduction of provision for shrinkage, obsolescence and mark-downs of $0.108 million (2021: an increase of $0.302 million in provision) due to improved stock management. Note 9: Other assets Prepayments Right of returni 2022 $’000 3,686 1,452 5,138 2021 $’000 Restated 2,979 634 3,613 i. The Company extended its change of mind policy from 14 days to 30 days on 7 September 2021 which provided a better experience for the Company’s customers. This resulted in an increase in right of return assets. Note 10: Plant and equipment Leasehold improvements $’000 Plant and equipment $’000 Total $’000 6,386 364 2,754 (10) 50,916 57,302 (364) 5,992 (255) – 8,746 (265) 9,494 56,289 65,783 (4,202) (25,871) (30,073) (7) (650) 10 (4,849) 4,645 7 – (5,009) (5,659) 255 265 (30,618) (35,467) 25,671 30,316 Cost Balance at 27 June 2021 Transferii Additions Disposals Balance at 26 June 2022 Accumulated depreciation Balance at 27 June 2021 Transferii Depreciation Disposals Balance at 26 June 2022 Carrying amount as at 26 June 2022 ii. Transfer of assets from Plant and equipment to Leasehold improvements. 102 Cost Balance at 28 June 2020 Additions Disposals Balance at 27 June 2021 Accumulated depreciation Balance at 28 June 2020 Depreciation Disposals Balance at 27 June 2021 Carrying amount as at 27 June 2021 Note 11: Intangible assets and goodwill Cost Balance at 27 June 2021 Additions Disposals Balance at 26 June 2022 Amortisation and impairment losses Balance at 27 June 2021 Amortisation Disposals Balance at 26 June 2022 Carrying amount as at 26 June 2022 Leasehold improvements $’000 Plant and equipment $’000 7,182 4 (800) 6,386 (4,186) (816) 800 (4,202) 2,184 43,270 10,812 (3,166) 50,916 (23,784) (5,227) 3,140 (25,871) 25,045 Total $’000 50,452 10,816 (3,966) 57,302 (27,970) (6,043) 3,940 (30,073) 27,229 Goodwill $’000 Intangibles $’000 45,321 - - 3,805 3,873 - 45,321 7,678 - - - - 45,321 (1,865) (509) - (2,374) 5,304 103 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Cost Balance at 28 June 2020 Adjustment for change in accounting policy (Note 2) Balance as at 28 June 2020 (restated) Additions Disposals Balance at 27 June 2021 Amortisation and impairment losses Balance at 28 June 2020 Adjustment for change in accounting policy (Note 2) Balance as at 28 June 2020 (restated) Amortisation Disposals Balance at 27 June 2021 Carrying amount as at 27 June 2021 Goodwill $’000 Intangibles $’000 45,321 5,816 - - - - (2,048) 3,768 44 (7) 45,321 3,805 - - - - - - 45,321 (2,126) 630 (1,496) (376) 7 (1,865) 1,940 Refer to Note 2(c) for detail on the inputs used in the impairment calculation of goodwill. Note 12: Leases The Company has lease contracts for various items of property, motor vehicles and material handling equipment used in its operations. Leases of buildings generally have lease terms between 5 and 12 years, while motor vehicles and material handling equipment generally have lease terms between 1 and 6 years. The Company’s obligations under its leases are secured by the lessor’s title to the leased assets. Generally, the Company is restricted from assigning and subleasing the leased assets. There are several lease contracts that include extension options and variable lease payments. Relevant factors the Company considers in determining the likelihood to exercise a lease renewal, to the point of reasonable certainty, include the Company’s overall property strategy, the importance of the leased asset to the Company, the existence of renewal options and their pricing, whether the market is a new market or an existing market, the costs of returning the leased asset in a contractually specified condition, the existence of alternate sites within the relevant catchment and the associated costs of a relocation, and any broader trends generally shaping the retail industry. The Company’s lease portfolio contains option periods averaging around 5 years that are not considered reasonably certain options to be exercised. However, these options provide the Company flexibility in managing the leased asset portfolio. The present value of the lease payments to be made under options considered reasonably certain to be exercised has been included in the lease liability balance as at 26 June 2022. The Company has several lease contracts that include extension options. These options are negotiated to provide flexibility in managing the leased-asset portfolio and align with the Company’s business needs. The undiscounted potential future payments at current rental rates under options that are not considered reasonably certain to be exercised is $273.356 million (2021: $264.325 million), which includes potential lease payments within the next five years of $24.320 million (2021: $30.845 million) should those options be exercised. The Company has several lease commitments not recognised as a right-of-use asset and lease liability. The undiscounted future payments at current rental rates are $23.757 million (2021: nil). The Company also has certain leases of material handling equipment with lease terms of 12 months or less and leases of office equipment that are low in value. The Company applies the ‘short-term lease’ and ‘lease of low-value assets’ recognition exemptions for these leases. 104 Set out below are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period: As at 28 June 2020 Additions Remeasurements1 Depreciation expense As at 27 June 2021 Additions Remeasurements1 Depreciation expense As at 26 June 2022 1. Remeasurements of right of use asset primarily represents lease extensions of stores. Right of use Asset Motor Vehicles $’000 Material Handling Equipment $’000 170 210 - 1,402 1,433 24 Property $’000 91,932 37,611 1,584 Total $’000 93,504 39,254 1,608 (21,581) (149) (578) (22,308) 109,546 21,298 30,407 (24,682) 136,569 231 260 - (154) 337 2,281 1,410 - 112,058 22,968 30,407 (759) (25,595) 2,932 139,838 Lease Liabilities Opening balance Additions Accretion of interest Remeasurements1 Payments Closing balance Current Non-current Total lease liabilities 1. Remeasurements of lease liabilities primarily represents lease extensions of stores. The maturity analysis of lease liabilities are disclosed in Note 25 Financial Instruments. 2022 $’000 2021 $’000 125,289 105,978 22,968 39,254 6,102 29,851 4,729 1,608 (27,978) (26,280) 156,232 125,289 29,550 126,682 25,521 99,768 156,232 125,289 105 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued The following are the amounts recognised in profit and loss: Depreciation expense of right-of-use asset Interest expense on lease liabilities Rent expenses – short-term leases Rent expenses – leases of low-value assets (included in stores, administration and warehouse) Rent expenses - variable lease payments Total 2022 $’000 2021 $’000 25,595 22,308 6,102 4,729 104 656 51 584 3,002 2,814 35,459 30,486 The Company had total cash outflows for leases of $31.740 million in 2022 ($29.729 million in 2021). The Company also had non-cash additions to right-of-use assets and lease liabilities of $22.968 million in 2022 ($39.254 million in 2021). Note 13: Deferred tax assets Deferred tax balances are presented in the consolidated statement of financial position as follows: 2022 $’000 10,137 2021 $’000 Restated 11,692 Recognised in profit or loss Recognised in other comprehensive income Recognised in equity Closing balance Opening balance 1,950 165 963 222 620 123 (33,617) 37,588 (2,766) 6,444 - - 232 23 32 201 421 117 (6,640) 7,582 (1,300) 757 - 50 11,692 1,475 - - - - - - - - - - (122) - (122) - - - - - - - - - (2,908) - - 2,182 188 995 423 1,041 240 (40,257) 45,170 (4,066) 4,293 (122) 50 (2,908) 10,137 Deferred tax assets 2022 – Consolidated $’000 Employee benefits Non-deductible accruals Non-refundable layby income Inventories Gift vouchers Right of return Right of use asset Lease liability Property, plant and equipment Share-based payments Cash flow hedge reserve Unrealised FX gain/(loss) Total 106 2021 – Consolidated $’000 Restated Employee benefits Non-deductible accruals Non-refundable layby income Inventories Gift vouchers Right of return Right of use asset Lease liability Property, plant and equipment Share-based payments Total Note 14: Payables Current Trade payables Sundry payables Opening balance Recognised in profit or loss Recognised in other comprehensive income Recognised in equity 1,711 144 834 353 314 97 (28,051) 31,793 - - 7,195 239 21 129 (131) 306 26 (5,566) 5,795 (2,766) 2,249 302 - - - - - - - - - - - - - - - - - - - - 4,195 4,195 Closing balance 1,950 165 963 222 620 123 (33,617) 37,588 (2,766) 6,444 11,692 2022 $’000 2021 $’000 35,019 17,536 52,555 30,195 18,617 48,812 Terms and conditions of the above financial liabilities: • Trade payables are non-interest bearing and are normally settled on 30-day terms. • Sundry payable includes $6.194 million (2021: $6.113 million) of deposit and instalment payments received by the Company in relation to layby sales taken out by customers. • Sundry payables are non-interest bearing and have an average term of three months. • For explanations on the Company’s liquidity risk management processes, refer to Note 25(b). Note 15: Other liabilities Unredeemed gift cards and vouchersi Refund liabilityii Security deposits – car seat hire 2022 $’000 3,472 2,250 63 5,785 2021 $’000 2,068 1,044 51 3,163 i. The unredeemed gift cards are expected to be redeemed within three years. Loyalty vouchers have a redemption period of 30 days. ii. The Company extended its change of mind returns policy from 14 days to 30 days on 7 September 2021 which provided a better experience for the Company’s customers. This resulted in an increase in refund liability. 107 Baby Bunting Annual Report 2022Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Note 16: Loans and borrowings Non-current - Secured Bank loan1 1. Bank loan is net of the loan establishment costs. 2022 $’000 2021 $’000 12,946 9,950 The ongoing funding requirements of the consolidated entity are provided by the National Australia Bank (“NAB”). On 30 March 2022, the Company entered into an amendment deed with NAB and the multi-option facility matures on 31 March 2025. 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 $78,000,000, consisting of $70,000,000 Corporate Market Loan (‘CML’) facility and $8,000,000 bank guarantee facility. The CML facility can be drawn to the lesser of $70,000,000 or 2.5 times the last 12 months historical rolling EBITDA. Interest on the facility is charged at a variable rate. The consolidated entity was in compliance with the facility agreement at 26 June 2022. The current facility does not require the consolidated entity to amortise borrowings. Note 17: Provisions Current Employee benefits Total current Non-current Employee benefits Make-good provision Total non-current Make-good provision Opening balance Arising during the yeari Closing balance 2022 $’000 2021 $’000 6,537 6,537 745 563 1,308 2022 $’000 - 563 563 5,804 5,804 691 - 691 2021 $’000 - - - 1. Provision for make-good costs relates to the new 22,000 sqm National Distribution Centre and Store Support Centre in the event the Company was to vacate the premises at the end of the lease. 108 Note 18: Issued capital Fully paid ordinary shares Balance at beginning of the year Issue of shares: - Employee Gift Offer - LTI vesting 26 June 2022 27 June 2021 No. of shares $’000 No. of shares $’000 129,255,075 87,153 127,564,474 86,358 135,051 760 165,221 3,068,000 - 1,525,380 795 - Balance at end of the year 132,458,126 87,913 129,255,075 87,153 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Note 19: Dividends Recognised amounts Final 2021 dividend Interim 2022 dividend $ per ordinary share 2022 $’000 $ per ordinary share 0.083 0.066 10,772 8,740 0.064 0.058 2021 $’000 8,164 7,497 On 13 August 2021, the Directors determined to pay a fully franked final dividend of 8.3 cents per share to the holders of fully paid ordinary shares in respect of the financial year ended 27 June 2021. The dividend was subsequently paid to shareholders on 10 September 2021 totalling $10.772 million. On 11 February 2022, the Directors determined to pay an interim fully franked dividend of 6.6 cents per share to the holders of fully paid ordinary shares in respect of the half-year ended 26 December 2021. The dividend was subsequently paid to shareholders on 11 March 2022 totalling $8.740 million. On 12 August 2022, the Directors determined to pay a fully franked final dividend of 9.0 cents per share to the holders of fully paid ordinary shares in respect of the financial year ended 26 June 2022, to be paid to shareholders on 9 September 2022. 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 2022. The total estimated dividend to be paid is $11.921 million. Adjusted franking account balance Franking credits that will arise from the payment of income tax payable as at the end of the financial year Franking debits that will arise from the payment of income tax receivable as at the end of the financial year Company 2021 $’000 7,757 - 2022 $’000 4,282 1,721 - (1,056) Franking debits that will arise from the payment of final dividend in respect of the financial year (5,109) (4,597) There are no income tax consequence attached to the payment of dividends in either 2022 or 2021 by the Company to its shareholders. 109 Baby Bunting Annual Report 2022Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Note 20: Retained earnings Retained earnings Balance at beginning of year Profit attributable to owners of the Company Payment of dividends Share-based paymentsi Balance at end of year 2022 $’000 5,772 19,521 2021 $’000 Restated 1,439 17,039 (19,512) (15,661) 3,649 9,430 2,955 5,772 i. In FY22, 3,068,000 performance rights vested under the Company’s Long Term Incentive Plan (FY21: 1,525,380 performance rights) (market value of $17.362 million (FY21: market value of $7.339 million)). This vesting resulted in an income tax benefit of $1.559 million (FY21: $0.266 million) and an increase to the share-based payment tax reserve of $3.649 million (FY21: $2.955 million). The vested portion of $3.649 million (FY21: $2.955 million) was transferred to retained earnings. Note 21: Segment information 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. During the year, the Company sold products online to New Zealand customers and has embarked on a plan to establish a store network in New Zealand (with the first store expected to be opened in 1H FY23). However, transactions occur in Australian dollars and are undertaken by Baby Bunting Pty Ltd. On this basis, management has identified one reportable segment, Australia. The following is an analysis of the consolidated entity’s revenue and results from continuing operations by reportable segment: Australia 2021 $’000 Restated 2022 $’000 Total 2021 $’000 Restated 2022 $’000 507,274 468,377 507,274 468,377 44,619 33,906 44,619 33,906 350,669 299,783 350,669 299,783 12,619 31,763 10,860 28,631 12,619 31,763 10,860 28,631 220,779 186,548 220,779 186,548 235,948 193,709 235,948 193,709 Revenue Operating EBIT Total segment assets Additions to plant and equipment and intangibles Depreciation and amortisation Total non-current assets1 Total segment liabilities 1. Non-current assets exclude deferred tax assets. 110 Revenue reported above represents revenue generated from external customers. Inter-segment sales is eliminated on consolidation in the current reporting period (2021: 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 measurement basis excludes the effects of interest revenue, other operating income, finance costs, income tax and employee equity expenses. Operating EBIT A reconciliation of operating EBIT to profit before tax is provided as follows: Operating EBIT Interest revenue Other operating income Finance expenses Employee equity expenses Profit before tax Segment assets and liabilities 2022 $’000 2021 $’000 Restated 44,619 33,906 - - - 2,466 (6,987) (5,650) (9,330) (8,170) 28,302 22,552 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: Total segment assets Total segment liabilities Note 22: Reserves a. Share-based payments Share-based payments reserve Balance at beginning of period Performance rights – expense (Note 22(b)) Balance at end of period 2022 $’000 2021 $’000 Restated 350,669 299,783 235,948 193,709 2022 $’000 2021 $’000 8,954 6,828 15,782 4,380 4,574 8,954 111 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued b. Performance rights The consolidated entity has previously 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 that vest, across various grants, will be determined by reference to certain performance conditions that include some or all of the following: – Earnings per share (EPS) growth; – Total shareholder return (TSR) growth; and – Service condition (Retention rights, EPS, TSR). Fair value of performance rights granted The weighted average fair value of the performance rights TSR component granted during the reporting period under the LTI Plan is $1.89 (2021: $2.18). 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 Grant date 2021 (TSR CAGR) 2021 (EPS CAGR) 2022 (TSR CAGR) 2022 (EPS CAGR) 24 December 2020 24 December 2020 23 November 2021 23 November 2021 Grant date fair value Exercise price Expiry date $2.18 $4.67 $1.89 $5.81 nil nil nil nil (1) (1) (1) (1) 1. These performance rights vest and can be exercised at the end of the relevant performance and service period, subject to meeting the relevant performance and/or service conditions. The Board determines whether vesting occurs. Any performance rights that have not vested following the final applicable performance period lapse. Share Price Exercise price Expected volatility Expected life (years) Expected dividend yield Risk-free interest rate 2022 (TSR CAGR) 2021 (TSR CAGR) $5.49 $4.67 Nil 40% 2.85 3.00% 1.01% nil 52% 2.80 3.22% 0.15% Movements in performance rights during the year The consolidated entity recorded a share-based payments expense for performance rights of $6.828 million (2021: $4.574 million) disclosed in the Consolidated Statement of Profit or Loss and Other Comprehensive Income under “Administrative expenses”. 112 The following reconciles the performance rights outstanding at the beginning and end of the year: 52 weeks ended 26 June 2022 52 weeks ended 27 June 2021 TSR Number of rights EPS Number of rights Retention Number of rights TSR Number of rights EPS Number of rights Retention Number of rights Balance at beginning of the period 3,737,500 3,737,500 564,000 3,932,880 2,407,500 564,000 Granted during the period 825,000 550,000 Forfeited during the period - - - - 1,330,000 1,330,000 Exercised during the period (1,252,000) (1,252,000) (564,000) (1,525,380) - - - - - - - - - Lapsed during the period - - Balance at end of period 3,310,500 3,035,500 Exercisable at end of period - - - - - 3,737,500 3,737,500 564,000 - - - c. General Employee Share Plan (“GESP”) The consolidated entity has previously 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 reporting period, the Board issued a total of 135,051 shares (2021: 165,221 shares) in the Employee Gift Offer with no monetary consideration payable by participating eligible employees. Shares issued are subject to a disposal restriction in accordance with current Australian tax legislation. The fair value of $0.760 million (2021: $0.795 million) was fully expensed at the time of granting, as there are no performance or service conditions. d. Share-based payment tax reserve Share-based payment tax reserve Balance at beginning of period Tax effect of share-based payments1 Transfer to retained earnings2 Balance at end of period 26 Jun 2022 $’000 27 Jun 2021 $’000 4,195 741 - 7,150 (3,649) (2,955) 1,287 4,195 1. $0.741 million (2021: $7.150 million) represents an increase in future income tax benefits recognised in share-based payment tax reserve that is in excess of any future benefits relating to the cumulative share-based payment expense recognised in profit or loss. This increase in the reserve reflects the likelihood of greater number of performance rights vesting, relative to what was estimated as at the last reporting date, plus the addition of the 2022 performance rights granted to executives in November 2021 under the Company’s Long Term Incentive Plan. 2. In FY22, 3,068,000 (2021: 1,525,380) performance rights vested under the Company’s Long Term Incentive Plan (market value: $17.362 million (2021: market value of $7.339 million)). The balance transferred to retained earnings represents the income tax benefit recorded in the reserves associated with share- based payments that vested in the current period. 113 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Note 23: 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. Loans to and from key management personnel and directors As at the end of the current reporting period, no loans were outstanding to or from key management personnel or directors of the consolidated entity (2021: nil). b. 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 Share-based payments Cash incentive payment 2022 $ 2021 $ 1,595,078 1,803,857 105,699 36,831 88,068 26,823 2,256,794 1,652,687 - 1,445,234 3,994,402 5,016,669 Note 24: Commitments for expenditure Capital commitments The consolidated entity has capital commitments totalling nil (2021: nil). Note 25: 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 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. 114 The consolidated entity holds the following financial assets and liabilities at reporting date: Financial assets Cash and cash equivalents Other receivables Derivatives not designated as hedging instruments1 Derivatives designated as hedging instruments2 Financial liabilities Trade and other payables Other liabilities Borrowings Lease liability 2022 $’000 2021 $’000 12,238 5,303 - 407 10,884 5,916 66 - 17,948 16,866 52,555 48,812 2,250 12,946 1,044 9,950 156,232 125,289 223,983 185,095 1. Derivatives not designated as hedging instruments reflect the positive change in fair value of those foreign exchange forward contracts that are not designated in hedge relationships, but are, nevertheless, intended to reduce the level of foreign currency risk for expected sales and purchases. 2. Derivatives designated as hedging instruments reflect the positive change in fair value of foreign exchange forward contracts, designated as cash flow hedges to hedge highly probable inventory purchases in US dollars (USD). a. Market risk i. Foreign exchange risk The majority of the consolidated entity’s operations are transacted in the functional currency, AUD of the Company and therefore exposure to foreign exchange risk is limited to around 12% of goods which are purchased in a foreign currency. Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s operating activities (when revenue or expense is denominated in a foreign currency). The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments is foreign currency risk. Foreign exchange forward contracts are designated as hedging instruments in cash flow hedges of forecast purchases in US dollars. These forecast transactions are highly probable, and they comprise about 12% of the Company’s total expected purchases. The foreign exchange forward contract balances vary with the level of expected foreign currency purchases and changes in foreign exchange forward rates. There is an economic relationship between the hedged items and the hedging instruments as the terms of the foreign exchange forward contracts match the terms of the expected highly probable forecast transactions (i.e., notional amount and expected payment date). The Company has established a hedge ratio of 1:1 for the hedging relationships as the underlying risk of the foreign exchange forward contracts are identical to the hedged risk components. To test the hedge effectiveness, the Company uses the hypothetical derivative method and compares the changes in the fair value of the hedging instruments against the changes in fair value of the hedged items attributable to the hedged risks. The hedge ineffectiveness can arise from: – Differences in the timing of the cash flows of the hedged items and the hedging instruments. – Different indexes (and accordingly different curves) linked to the hedged risk of the hedged items and hedging instruments. 115 Baby Bunting Annual Report 2022Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued – The counterparties’ credit risk differently impacting the fair value movements of the hedging instruments and hedged items. – Changes to the forecasted amount of cash flows of hedged items and hedging instruments. The Company manages its foreign currency risk by hedging transactions that are expected to occur based on forecasted purchases. When a derivative is entered into for the purpose of being a hedge, the Company negotiates the terms of the derivative to match the terms of the hedged exposure. For hedges of forecast transactions, the derivative covers the period of exposure from the point the cash flows of the transactions are forecasted up to the point of settlement of the resulting payable that is denominated in the foreign currency. At 26 June 2022, the Company adopted a hedging practice to address the currency risk using foreign currency forward contracts. The hedged purchases were highly probable at the reporting date. Less than 1 month 1 to 3 months 3 to 6 months 6 to 9 months 9 to 12 months As at 26 June 2022 Foreign exchange forward contracts (highly probably forecast purchase) Notional amount (in $AUD’000) Average forward rate (AUD/USD) 1,859 0.6992 7,824 0.7172 1,599 0.6881 As at 27 June 2021 Foreign exchange forward contracts (highly probably forecast purchase) Notional amount (in $AUD’000) Average forward rate (AUD/USD) ii. Cash flow and fair value interest rate risk - - - - - - - - - - - - - - Maturity Total 11,282 - 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 150 basis points (2021: 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 27 June 2021 Financial assets Other financial assets Total increase/(decrease) 116 Change in USD rate Carrying amount $’000 Foreign exchange risk -50bps +50 bps Profit $’000 Profit $’000 - - - - - - At 26 June 2022 Financial assets Other financial assets Total increase/(decrease) At 27 June 2021 Financial liabilities Borrowings – CML Facility Total increase/(decrease) At 26 June 2022 Financial liabilities Borrowings – CML Facility Total increase/(decrease) b. Liquidity risk Change in USD rate Carrying amount $’000 Foreign exchange risk -150bps +150 bps Profit $’000 Profit $’000 11,282 - (169) (169) 169 169 Interest rate risk -50bps +50 bps Profit $’000 Profit $’000 50 50 (50) (50) Interest rate risk -150bps +150 bps Profit $’000 Profit $’000 Carrying amount $’000 10,012 - Carrying amount $’000 13,075 - 196 196 (196) (196) 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: CML Facility Bank Guarantee Facility Total Facility Limit $’000 70,000 8,000 2022 Utilised $’000 13,075 3,005 Limit $’000 70,000 8,000 2021 Utilised $’000 10,012 3,471 78,000 16,080 78,000 13,483 117 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued 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. Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total $’000 Weighted average effective interest rate % Maturity At 26 June 2022 Financial assets Cash and cash equivalents Other receivables Other financial assets Financial liabilities Trade and other payables 52,555 Other liabilities Lease liability Borrowings – CML facility 2,250 14,916 - 12,238 5,303 407 17,948 - - - - - - - - - - - - - - - - - - - - - - - - 12,238 5,303 407 17,948 52,555 2,250 - - - - 15,329 57,542 46,233 42,723 176,743 69,721 15,329 57,542 - - 12,946 59,179 - 12,946 1.62% 42,723 244,494 Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total $’000 Weighted average effective interest rate % Maturity At 27 June 2021 Financial assets Cash and cash equivalents 10,884 Other receivables Other financial assets Financial liabilities Trade and other payables Other liabilities Lease liability 5,916 66 16,866 48,812 1,044 - - - - - - - - - - - - - - - - - - - - - - - - 10,884 5,916 66 16,866 48,812 1,044 - - - - - 14,063 12,238 43,106 36,585 40,758 146,750 Borrowings – CML facility - - 9,950 - - 9,950 1.58% 63,919 12,238 53,056 36,585 40,758 206,556 118 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. Note 26: Notes to the statement of cash flows a. Reconciliation of profit 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 Changes in assets and liabilities: Decrease/(Increase) in other receivables Decrease/(Increase) in other assets Decrease/(Increase) in inventories Decrease/(Increase) in deferred tax assets Increase/(Decrease) in trade and other payables Increase/(Decrease) in provisions Increase/(Decrease) in income tax assets/liability Increase/(Decrease) in other financial liabilities Net cash provided by operating activities 2022 $’000 19,521 31,763 7,588 2021 $’000 Restated 17,039 28,631 5,396 679 (2,184) (743) (1,197) (16,679) (14,893) (842) 4,019 1,346 4,532 2,622 (54) (1,094) 793 636 1,155 52,365 35,669 119 Baby Bunting Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued 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 2022 $’000 84 12,154 12,238 2021 $’000 79 10,805 10,884 Note 27: Parent entity disclosures As at, and throughout, the 52 weeks ended 26 June 2022 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 Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity of the parent entity comprising of: Issued capital Reserves Retained earnings Total equity Parent Entity 2022 $’000 2021 $’000 19,521 14,487 - - 19,521 14,487 - - 102,143 98,485 102,143 98,485 1,304 1,304 - - 1,304 1,304 86,357 86,357 - - 14,482 10,824 100,839 97,181 The Company does not have any contractual commitments for the acquisition of property, plant and equipment (27 June 2021: nil). The Company does not have any contingent liabilities (27 June 2021: nil) 120 Note 28: Group entities Baby Bunting Group Limited has three 100% owned subsidiaries, Baby Bunting Pty Ltd, Baby Bunting EST Pty Ltd and Baby Bunting NZ Limited. 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 Corporations (Wholly-owned Companies) Instrument 2016/785, 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 additional Company and subsidiary financial statements are not presented. Subsidiaries listing Name of subsidiary Baby Bunting Pty Ltd1 Baby Bunting EST Pty Ltd2 Baby Bunting NZ Limited Proportion of ownership interest and voting power held by the Company June 2022 June 2021 100% 100% 100% 100% Principal activity Place of incorporation and operation Retailing of baby merchandise Australia Australia Trustee of the trust established in connection with the Company’s employee share plans Retailing of baby merchandise in New Zealand New Zealand 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 that are party to the deed of cross guarantee. 121 Baby Bunting Annual Report 2022Notes to the Consolidated Financial Statements for the year ended 26 June 2022 continued Note 29: 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. a. Basic earnings per share 2022 2021 Restated cents per share cents per share 14.9 14.3 13.2 12.6 Basic earnings per share is calculated by dividing the profit for the year attributable to members of the ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. 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 1. In the current and comparative reporting periods there were no discontinued operations. 2022 $’000 19,521 2021 $’000 Restated 17,039 Number Number Weighted average number of ordinary shares for the purposes of basic earnings per share 131,387,517 128,708,525 b. Diluted earnings per share Diluted earnings per share is calculated by dividing the profit attributable to members of the ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. The earnings used in the calculation of diluted earnings per share are as follows: Earnings used in the calculation of diluted earnings per share from continuing operations1 2022 $’000 19,521 2021 $’000 Restated 17,039 1. In the current and comparative reporting periods there were no discontinued operations. 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 for the purposes of diluted earnings per share2 Number Number 136,151,386 134,896,637 2. The weighted average number of shares takes into account the weighted average effect of performance rights granted during the year. 122 Note 30: Remuneration of auditors Assurance Services Review of the financial report for the half-year Audit of the year-end financial report Tax and Consulting Services Taxation services Remuneration advisory services Total remuneration 2022 $ 2021 $ 47,850 143,550 191,400 18,590 11,845 30,435 211,835 38,350 135,050 173,400 18,950 7,674 26,624 200,024 The auditors of the consolidated entity and the Company are Ernst & Young. From time to time, Ernst & Young provides other services to the consolidated entity and the Company, which are subject to the corporate governance procedures adopted by the Company. Note 31: Events after balance sheet date Dividends on the Company’s ordinary shares A final dividend of 9.0 cents per fully paid ordinary shares has been determined for the year ended 26 June 2022 - refer Note 19. 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 2022. 123 Baby Bunting Annual Report 2022Directors’ Declaration 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. In the Directors’ opinion, there are reasonable grounds to believe that the Company and its subsidiary which have entered into the Deed of Cross Guarantee, as detailed in Note 28 to the financial statements will 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 Melanie Wilson Chair 12 August 2022 124 Independent Auditor’s Report 125 A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationErnst & Young8 Exhibition StreetMelbourne VIC 3000 AustraliaGPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000Fax: +61 3 8650 7777ey.com/auIndependent Auditor's Report to the Members of Baby Bunting GroupLimitedReport on the Audit of the Financial ReportOpinionWe have audited the financial report of Baby Bunting Group Limited (the Company) and its subsidiaries(collectively the Group), which comprises the consolidated statement of financial position as at26 June 2022, the consolidated statement of profit or loss and other comprehensive income,consolidated statement of changes in equity and consolidated statement of cash flows for the yearthen ended, notes to the financial statements, including a summary of significant accounting policies,and the directors' declaration.In our opinion, the accompanying financial report of the Group is in accordance with theCorporationsAct 2001, including:(a)giving a true and fair view of the consolidated financial position of the Group as at 26 June 2022and of its consolidated financial performance for the year ended on that date; and(b)complying with Australian Accounting Standards and theCorporations Regulations 2001.Basis for OpinionWe conducted our audit in accordance with Australian Auditing Standards. Our responsibilities underthose standards are further described in theAuditor’s Responsibilities for the Audit of the FinancialReport section of our report. We are independent of the Group in accordance with the auditorindependence requirements of theCorporations Act 2001 and the ethical requirements of theAccounting Professional and Ethical Standards Board’s APES 110Code of Ethics for ProfessionalAccountants(including Independence Standards) (the Code) that are relevant to our audit of thefinancial report in Australia. We have also fulfilled our other ethical responsibilities in accordance withthe Code.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basisfor our opinion.Key Audit MattersKey audit matters are those matters that, in our professional judgement, were of most significance inour audit of the financial report of the current year. These matters were addressed in the context ofour audit of the financial report as a whole, and in forming our opinion thereon, but we do not providea separate opinion on these matters. For each matter below, our description of how our auditaddressed the matter is provided in that context.We have fulfilled the responsibilities described in theAuditor’s Responsibilities for the Audit of theFinancial Report section of our report, including in relation to these matters. Accordingly, our auditincluded the performance of procedures designed to respond to our assessment of the risks ofmaterial misstatement of the financial report. The results of our audit procedures, including theprocedures performed to address the matters below, provide the basis for our audit opinion on theaccompanying financial report.Baby Bunting Annual Report 2022Independent Auditor’s Report continued 126 A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationCarryingvalue of inventoriesWhysignificantHow our audit addressed the key audit matterAs at 26 June 2022, the Group held $96.7million in inventories representing 28% of totalassets of the Group.As detailed in Note 2(h) of the financial report,inventories are valued at the lower of cost andnet realisable value.The cost of inventory is determined using aweighted average cost approach adjusted forvolume rebates and settlements discounts.Judgement was required to be exercised by theGroup to determine the net realisable value foritems which may be ultimately sold below cost.These judgements include consideration ofexpectations for future sales based on historicalexperience.Given the process and judgement involved indetermining the cost and carrying value ofinventories, this was considered a key auditmatter.►Assessed the appropriateness of the Group’saccounting policies in relation to inventoryincluding volume rebates and settlementdiscounts in accordance with AustralianAccounting Standards.►Assessed the design and operating effectivenessof relevant controls used by the Group to recordthe cost of inventories and tested the cost priceof inventory recorded for a sample of inventoryitems to supplier invoices.►Assessed the effectiveness of controls in placerelating to the recognition and measurement ofrebate and settlement discount amounts andtested a sample of rebates and discounts toindividual supplier agreements.►Assessed the basis for inventory provisionsrecorded by the Group for slow movinginventories and stock losses. In doing so, weexamined the Group’s process for identifyingslow moving inventories, negative margin,historical stock loss rate trends and expectedcosts to sell and had discussions with inventorycontrollers on inventory management.►Considered the impact of sales subsequent toyear end on the value of inventories at balancedate by comparing the actual selling prices to thecarrying value for a sample of inventories.Information Other than the Financial Report and Auditor’s Report ThereonThe directors are responsible for the other information. The other information comprises theinformation included in the Company’s 2022 Annual Report, but does not include the financial reportand our auditor’s report thereon.Our opinion on the financial report does not cover the other information and accordingly we do notexpress any form of assurance conclusion thereon, with the exception of the Remuneration Reportand our related assurance opinion.In connection with our audit of the financial report, our responsibility is to read the other informationand, in doing so, consider whether the other information is materially inconsistent with the financialreport or our knowledge obtained in the audit or otherwise appears to be materially misstated.127 A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationIf, based on the work we have performed, we conclude that there is a material misstatement of thisother information, we are required to report that fact. We have nothing to report in this regard.Responsibilities of the Directors for the Financial ReportThe directors of the Company are responsible for the preparation of the financial report that gives atrue and fair view in accordance with Australian Accounting Standards and theCorporations Act 2001and for such internal control as the directors determine is necessary to enable the preparation of thefinancial report that gives a true and fair view and is free from material misstatement, whether due tofraud or error.In preparing the financial report, the directors are responsible for assessing the Group’s ability tocontinue as a going concern, disclosing, as applicable, matters relating to going concern and using thegoing concern basis of accounting unless the directors either intend to liquidate the Group or to ceaseoperations, or have no realistic alternative but to do so.Auditor's Responsibilities for the Audit of the Financial ReportOur objectives are to obtain reasonable assurance about whether the financial report as a whole isfree from material misstatement, whether due to fraud or error, and to issue an auditor’s report thatincludes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that anaudit conducted in accordance with the Australian Auditing Standards will always detect a materialmisstatement when it exists. Misstatements can arise from fraud or error and are considered materialif, individually or in the aggregate, they could reasonably be expected to influence the economicdecisions of users taken on the basis of this financial report.As part of an audit in accordance with the Australian Auditing Standards, we exercise professionaljudgement and maintain professional scepticism throughout the audit. We also:Identify and assess the risks of material misstatement of the financial report, whether due tofraud or error, design and perform audit procedures responsive to those risks, and obtain auditevidence that is sufficient and appropriate to provide a basis for our opinion. The risk of notdetecting a material misstatement resulting from fraud is higher than for one resulting fromerror, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or theoverride of internal control.Obtain an understanding of internal control relevant to the audit in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Group’s internal control.Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by the directors.Baby Bunting Annual Report 2022Independent Auditor’s Report continued 128 A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationConclude on the appropriateness of the directors’ use of the going concern basis of accountingand, based on the audit evidence obtained, whether a material uncertainty exists related toevents or conditions that may cast significant doubt on the Group’s ability to continue as a goingconcern. If we conclude that a material uncertainty exists, we are required to draw attention inour auditor’s report to the related disclosures in the financial report or, if such disclosures areinadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained upto the date of our auditor’s report. However, future events or conditions may cause the Groupto cease to continue as a going concern.Evaluate the overall presentation, structure and content of the financial report, including thedisclosures, and whether the financial report represents the underlying transactions and eventsin a manner that achieves fair presentation.Obtain sufficient appropriate audit evidence regarding the financial information of the entitiesor business activities within the Group to express an opinion on the financial report. We areresponsible for the direction, supervision and performance of the Group audit. We remain solelyresponsible for our audit opinion.We communicate with the directors regarding, among other matters, the planned scope and timing ofthe audit and significant audit findings, including any significant deficiencies in internal control that weidentify during our audit.We also provide the directors with a statement that we have complied with relevant ethicalrequirements regarding independence, and to communicate with them all relationships and othermatters that may reasonably be thought to bear on our independence, and where applicable, actionstaken to eliminate threats or safeguards applied.From the matters communicated to the directors, we determine those matters that were of mostsignificance in the audit of the financial report of the current year and are therefore the key auditmatters. We describe these matters in our auditor’s report unless law or regulation precludes publicdisclosure about the matter or when, in extremely rare circumstances, we determine that a mattershould not be communicated in our report because the adverse consequences of doing so wouldreasonably be expected to outweigh the public interest benefits of such communication.Report on the Audit of the Remuneration ReportOpinion on the Remuneration ReportWe have audited the Remuneration Report included in pages 55 to 76 of the directors' report for theyear ended 26 June 2022.In our opinion, the Remuneration Report of Baby Bunting Group Limited for the year ended26 June 2022, complies with section 300A of theCorporations Act 2001.129 A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationResponsibilitiesThe directors of the Company are responsible for the preparation and presentation of theRemuneration Report in accordance with section 300A of theCorporations Act 2001. Ourresponsibility is to express an opinion on the Remuneration Report, based on our audit conducted inaccordance with Australian Auditing Standards.Ernst & YoungTony MorsePartnerMelbourne12 August 2022Baby Bunting Annual Report 2022Shareholder information as at 4 July 2022 Baby Bunting Group Limited has one class of shares on issue (being fully paid ordinary shares). There are 132,458,126 shares on issue. All of the Company’s shares are listed on the Australian Securities Exchange. There is no current on-market buy-back. Twenty Largest Shareholders Name J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited National Nominees Limited BNP Paribas Nominees Pty Ltd BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd BNP Paribas Noms Pty Ltd Mr Matthew Spencer Fiddian Teal Nominees Pty Ltd Citicorp Nominees Pty Limited Mr Graeme John Haines + Mrs Sharni Gay Haines + Mr Malcom Arnold Haines Fergus & Co Pty Ltd Mr Scott Teal Mr Michael Pane Mr Darin Hoekman Highmont Heights Pty Ltd Mr Corey Lewis Oakleytower Pty Limited Coolum Oak Pty Ltd 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Australian Executor Trustees Limited Number of shares % of shares 33,818,136 27,397,339 19,873,197 8,331,867 2,462,355 1,942,296 1,742,986 1,094,459 889,439 860,720 671,264 488,974 475,843 419,110 400,297 400,000 374,644 358,781 325,000 295,564 25.53 20.68 15.00 6.29 1.86 1.47 1.32 0.83 0.68 0.65 0.51 0.37 0.36 0.32 0.30 0.30 0.28 0.27 0.25 0.22 Total 102,632,271 77.48 130 Unmarketable parcels There were 623 holdings of less than a marketable parcel (less than $500 in value or less than 122 shares) based on the closing market price of $4.12 per share at 4 July 2022. Distribution of Shareholders and Shareholdings Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Total holders % of total holders Number of shares % of shares 4,089 2,976 771 482 47 48.9 35.6 9.2 5.8 0.6 1,770,537 7,511,158 5,728,904 10,398,765 107,048,762 8,365 100.0 132,458,126 1.34 5.67 4.33 7.85 80.82 100.0 Substantial shareholders As at 4 July 2022, the substantial holders (as disclosed in substantial holdings notices given to the Company) are: Name AustralianSuper Pty Ltd Bennelong Funds Management Group Pty Ltd Date of most recent notice 10 Sept 202 13 Aug 2021 Number of shares 17,710,679 13,727,084 Relevant interest 13.65% 10.58% Voting rights of ordinary shares The Company’s Constitution sets out the voting rights attached to ordinary shares. In summary, shareholders may vote at a meeting of shareholders in person, directly or by proxy or attorney and, in the case of a shareholder that is a company, also by representative. On a show of hands, a shareholder has one vote. On a poll, a shareholder has one vote for every fully paid share held. Performance rights The Company has unquoted performance rights on issue. As at 4 July 2022, there were 12 holders of performance rights. There are no voting rights attached to performance rights. 131 Baby Bunting Annual Report 2022This page has been left blank intentionally. 132 Corporate Directory Registered Office Baby Bunting Group Limited 153 National Drive Dandenong South VIC 3175 (03) 8795 8100 Directors Melanie Wilson Gary Levin Donna Player Gary Kent Francine Ereira Stephen Roche Matt Spencer Company Secretary Corey Lewis Investor Relations Darin Hoekman Chief Financial Officer (03) 8795 8100 Shareholder Enquiries Share Registry Computershare Investor Services Pty Ltd GRP Box 2975 Melbourne VIC 3001 1800 850 505 (within Australia) +61 3 9415 4000 (outside Australia) Auditor Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Securities Exchange Listing Baby Bunting Group Limited shares are listed on the Australian Securities Exchange (ASX) (ASX code: BBN) Investor website babybunting.com.au/investor Online store babybunting.com.au babybunting.co.nz 133 Baby Bunting Annual Report 2022

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