These top 2 ASX shares should be on your watchlist

There are some top ASX shares that may be worth a spot on your watchlist because of their strong business plans.

The below businesses are generating good growth, expanding their businesses and getting the attention of investors:

Baby Bunting Group Ltd (ASX: BBN)

Baby Bunting is the largest retailer of baby and infant products. It has been operating for over 40 years and it now has 59 stores with plans for up to 100 stores.

In July 2020, Baby Bunting started shipping online orders to New Zealand. It has announced plans to launch a multi-channel retail offering in New Zealand with the first store anticipated to open in FY22 as part of a network plan of at least 10 stores. The ASX retail share noted there are no large format baby specialty retail chains in the market.

Morgans is one of the brokers that rates Baby Bunting as a buy with a price target of $6.39 – it likes the move into New Zealand because it improves the growth runway even more.

Baby Bunting had a particularly strong first half of FY21 – total sales increased by 16.6% to $217.3 million, with online sales going up by 95.9%. The gross profit margin improved by 41 basis points to 37.4%, pro forma earnings before interest, tax, depreciation and amortisation (EBITDA) increased 29.7% to $18.5 million and pro forma net profit after tax (NPAT) grew 43.5% to $10.8 million.

The growth has continued into the second half of FY21, with comparable store sales growth for the first six weeks of 18.5%.

According to Morgans, the Baby Bunting share price is valued at 28x FY21’s estimated earnings.  

Reject Shop Ltd (ASX: TRS)

Reject Shop aims to provide great value on everyday items. It sells some brands like Cadbury, L’Oreal, Nivea, Finish, Omo and Carmen’s. It now has over 350 store locations across Australia, after starting over four decades ago.

The discount ASX retail share is liked by a few different brokers including Morgans, which was impressed by the level of growth and level of costs.

Morgans rates Reject Shop as a buy with a price target of $8.91.

In the recent reporting season, Reject Shop said that underlying net profit after tax (NPAT) went up by 46.5% to $16.3 million. Underlying earnings before interest and tax (EBIT) grew 44.9% to $23.3 million and underlying EBITDA went up by 20.8% to $31.1 million.

Whilst keeping in mind that the company expects to report a loss in the second half of the year, it continues to focus on fixing the business as part of the turnaround strategy.

In the second half, the ASX share’s management will continue to focus on cost reduction, driven by business simplification and operational efficiency.

Reject Shop CEO Andre Reich said:

We believe the discount variety sector presents a significant opportunity for growth over the medium to long term. As Australia’s largest discount variety retailer, and with our strong balance sheet, The Reject Shop is well positioned to capture this opportunity.

There is further work to be done to ‘fix’ The Reject Shop and, once the cost base is optimised, we expect to be well-placed to pursue longer-term growth via store network expansion and by growing our online presence.

According to Morgans, the Reject Shop share price is trading at 27x FY21’s estimated earnings and 18x FY22’s estimated earnings.

More reading

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• 3 top ASX shares rated as buys by brokers
• 2 ASX shares rated as buys by many brokers

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Baby Bunting. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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