Adairs: Rocking chair - 1H22 result impacted by logistical issues, but it will get better

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
22 February 2022, 8:00 AM
Sectors Covered:
Gaming and Retail

  • Adairs (ASX:ADH) reported 1H22 earnings in line with last month’s pre-announcement. Underlying sales were positive, supported by online. Earnings were impacted by COVID disruption to logistics. This will improve as 2H22 progresses.
  • We have made no major changes to our earnings estimates.
  • We retain an ADD rating. Our target price moves from (login to view).

Event

ADH pre-announced its 1H22 sales and pre-AASB 16 EBIT on 24 January. There were no surprises in the headline numbers released today, although gross profit was ahead of expectations (offset by higher operating expenses) to arrive at a pre-AASB 16 EBIT including an initial contribution from Focus of $32.9m, within the guidance range of $32-33m.

Analysis

Sales supported by online channels.

Excluding Focus, 1H22 LFL sales were up +2.7%. This was driven by a good performance by online sales, which rose +8.2% to account for 42.6% of group sales. Mocka was the standout, with +22.8% sales growth despite delivery issues.

Adairs online was a more pedestrian +1.6%. At the Adairs store level, LFLs were down (3.4)%, when the effect of the lockdowns in NSW and Victoria is excluded. Online growth has continued into 2H22, with +14.8% growth in Mocka in the first seven weeks of the period, and +9.7% at Adairs online.

With customers seemingly avoiding shopping centres during the recent Omicron outbreak, it was little surprise to see Adairs store LFLs down (7.5)% in the first seven weeks. We expect this to get better, especially as the comps become less challenging as 2H22 goes on.

Distribution Centre disruption will ease by the end of 2H22.

Disruption at ADH’s recently opened National Distribution Centre (NDC), exacerbated by COVID-related absences, forced the company to extend the lease on one of its four legacy distribution centres (at Moorabbin) to de-risk the possibility of supply disruption to key Linen Lovers promotional events.

This impacted 1H22 EBIT by $2.5m. As the lease runs now until the end of 2H22, we expect a $4m EBIT impact in the current half. After that, however, the situation should improve and the annual savings of $3.5m previously flagged for the NDC will start to take effect.

Mocka affected by delivery issues.

Mocka’s courier partner in Australia was affected by COVID disruption and was responsible for significant delays in delivering product to customers.

ADH estimate the disruption hit EBIT by $1.4m, mainly because ADH felt unable to run the promotions it would otherwise have done for Mocka. The issues are now resolved as a replacement courier has been appointed.

Forecast and valuation update

There are no major changes to our estimates. Our EBIT estimate for FY22 falls by 1.6% to $84.5m ($81.5m pe-AASB 16). Our EBIT estimate for FY23 remains $106.4m ($102.7m pre-AASB 16).

Our price target is the average of our DCF and EV/EBIT-based valuations. It falls from (login to view) due to lower peer company multiples in our EV/EBIT-based valuation.

Investment view

Demand for ADH’s homewares is showing no sign of underlying weakness. The business has faced multiple challenges in recent months (many of which are in common with other retailers, but some are unique to ADH), but we think the investor should look to what comes next.

In FY23, we expect Focus to have bedded down and to have started a strategy of improving store economics while expanding its footprint.

We expect the NDC to be up and running and delivering efficiencies. We expect Mocka to be making its first steps towards an omni-channel strategy. These factors underpin an expectation of positive earnings growth in FY23 and FY24, which we do not think are reflected in the multiple. ADD.

Risks

Risks include a faster-than-expected downturn in consumer spending on furniture and homewares; and failure to achieve the rollout of Focus stores.

Find out more

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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