Consumer Discretionary

Adairs: Store closures and elevated costs have come to bite

Mon 24 Jan 22, 11:40am (AEST)
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Key Points

  • Adairs sales growth shrivels to -0.5% in first half of FY22 vs. 34.8% a year ago
  • Covid-related store closures, elevated supply chain costs and higher marketing costs to blame
  • Adairs now trades at a P/E ratio of just 10 vs. sector average of 24

Adairs (ASX: ADH) growth disappeared in the first half of FY22, with sales down -0.5% compared to a year ago. The company’s stock plunged -18.4% by 11:00 am AEDT. 

 Adairs said that government mandated store closures was the most significant factor weighing on sales in the first half. The restrictions reduced overall store trading days by approximately -31%. 

Management forecast that store closures cost the business circa $30-36m in sales and $14-18m earnings. Without lockdowns, first half sales could have hypothetically increased between 13% to 15.5%. 

Adairs’ margins came under pressure amid the recurring theme of elevated supply chain costs and increased promotional activity. The company said gross margins will be below the first half of FY21, but “well ahead” of pre-pandemic margins. 

Adairs expects first half earnings to be within the range of $32-33m, an almost 50% decline compared to a year ago. 

Adairs is expected to release its official half year results on 21 February. 

Another one bites the dust 

Adairs joins the growing list of companies suffering from negative sales growth, weaker margins and elevated expenses. 

Recent victims include Inghams (ASX: ING) and Redbubble (ASX: RBL)

This has taken a major toll on Adairs’ balance sheet, with a first half net debt of $90.9m (compared to net cash of $22.1m in the first half of FY21). 

Looking ahead 

Adairs said that its delivery capacity remains constrained, but continues to improve. It expects high availability of product at its distribution centres and stores going into the second half. 

Lockdowns across Australia have been lifted since October last year, although staffing issues has remained an issue across the retail industry. 

Despite stores reopening, consumer confidence remains subdued, with ANZ-Roy Morgan’s Consumer Confidence survey flagging figures at its lowest since October 2020. 

ANZ Head of Australian Economics, David Plank said:

“Consumer confidence readings are usually positive during the month of January and the level of 97.9 is the weakest January result since 1992 … We don’t think the economy is as weak as these data might suggest, with the shock of the Omicron surge and strains on testing capability the key drivers of the fall rather than underlying economic conditions.”

What do brokers think 

Three major Australian brokers cover the stock. 

The consensus is a Buy with a $4.93 target price (61% upside).

Note: latest price targets are from November 2021. Updated targets should come after today’s update/reporting season.

Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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