Adairs Positioned For Growth In FY19

This story features ADAIRS LIMITED, and other companies. For more info SHARE ANALYSIS: ADH

Bedding specialist Adairs has turned around the business over FY18 and set its sights on strong growth in FY19.

-Expected to take market share from department stores over the medium term
-Solid update suggests FY19 growth aspirations are achievable
-Online penetration could hit 20.6% by FY21
 

By Eva Brocklehurst

Bedding specialist Adairs Ltd ((ADH)) is now in a much stronger position than a year ago, with a sturdy balance sheet and underlying momentum. Trading in FY19 is off to a strong start.

A turnaround in FY18 was driven by high levels of growth in categories such as home decor, furniture and soft furnishings as well as rapid growth in the online channel. In-store like-for-like sales growth was 9% while operating earnings (EBIT) were up 47%.

Wilsons notes the required controls are in place to protect margins and engineer sales growth and expects the business to take market share from department stores over the medium term.

The company has achieved like-for-like sales growth of 5.4% in the first seven weeks of FY19. Guidance for growth of 5-8% for the year is expected to be achieved through carrying more inventory over the remainder of the first half as well as more promotional activity.

Wilsons has a Buy rating and $2.61 target. The broker had expected the company to announce a special dividend in the second half, of 5c per share, but the board elected to retain cash to remain flexible for any initiatives in the near term. The broker retains a forecast for a special dividend in FY21.

The stock could re-rate, Goldman Sachs suspects, given the momentum in the core business. The strong start to trading is evidence the underlying fundamentals are solid and the company is now positioned for growth. The broker raises its rating to Buy from Neutral, with a target of $3.10.

Morgans observes the business bounced back after a difficult FY17 as net debt has fallen to $12.7m and allowed the board to increase the dividend by 69%. The footprint is being expanded with 7-10 new stores planned, amid closures of three Myer ((MYR)) concessions. Gross margin is expected in the range of 59-61%.

Morgans' forecasts are underpinned by assumptions of 6% like-for-like sales growth, eight new stores and a 60.3% gross margin. The broker points out Adairs is one of the few discretionary retailers that provides 12-month guidance, yet it is also trading on one of the cheapest multiples in the sector.

The stock's multiple has lagged specialty peers by some margin because of concerns around an ability to cycle the strength of FY18. However, Morgans believes this solid update should provide confidence that double-digit growth can be achievable in FY19-20. Morgans maintains an Add rating and $2.68 target.

New Zealand

In New Zealand, profits have been pushed out again as the company, in launching its first New Zealand store, has excess stock. The start had been far from ideal, UBS notes, although the venture has only lost -$1.5m over two years and breaking even is targeted for the second half of FY19.

Two additional stores are being opened in that period, taking the total to eight. International expansion is part of management's longer-term aspirations. However, UBS believes material delays could raise questions regarding the appeal of the Adairs offer outside of Australia.

Online

The company is guiding for online sales to be around 15% of the total, expecting its store and online businesses will complement each other. UBS notes online growth has shown little sign of slowing since the company re-positioned its website two years ago. Improved functionality has lifted traffic by 38% in FY18.

At the same time the better presentation of stock and more targeted offers have increased customer conversion rates. UBS believes Click & Collect will be a material driver of online sales and forecasts online penetration to hit 20.6% in FY21. UBS maintains a Buy rating and $2.85 target.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms