Adairs Positioned To Take Market Share

Small Caps | Jun 22 2020

Adairs has experienced strong sales since its home furnishing stores re-opened and the online business is robust, standing the company in good stead despite the uncertain outlook.

-Elevated uncertainty likely to persist over the medium term
-Well-placed to take market share in both stores and online
-Main risk is a material slowdown after September

 

By Eva Brocklehurst

Home furnishings retailer Adairs ((ADH)) remains buoyant, experiencing strong sales since its stores have re-opened, while enjoying a robust online business.

Moreover, JobKeeper support and rent relief are underpinning the business, at least for the next few months. The main risk is a material slowdown after September but the business is considered well-placed for a potential downturn.

Sales guidance of $385-390m for FY20 signals both online and in-store sales have grown strongly. Online, Mocka (furniture) is up 52% and Adairs (soft furnishings) is up 93% in the year to date.

UBS assesses the market is rational and maintains a Buy rating and $2.55 target, but is cautious about the outlook. The company has also acknowledged elevated uncertainty exists and is likely to persist over the medium term.

Goldman Sachs believes the FY20 results are likely to be a catalyst for the market to further appreciate the extent of the online business. Online sales are expected to represent 27% of Adairs sales.

Morgans suspects additional sales have come at a little extra cost and upgrades forecasts by 20%. The broker, retaining an Add rating and $2.62 target, assumes no final dividend but anticipates the company can escape the pandemic without requiring new capital.

No commentary on costs was provided and the broker expects gross margins are within historical levels, while conditions are likely to remain robust for at least the remainder of 2020.

Management withdrew guidance at the onset of the pandemic but with wage subsidies enhancing profitability, Canaccord Genuity believes Adairs can at least meet the top end of its prior guidance range ($385-400m) for FY20.

Moreover, the broker does not believe the valuation is stretched and retains a Buy rating and $2.52 target. In sum, if faultless execution continues and FY21 turns out to be the trough in earnings, then the stock is worth owning at current levels.

FY21

A full year contribution from Mocka should add another $4-5m in earnings (EBIT) and it appears plausible to Canaccord Genuity that Adairs will continue to take share from department stores.

Recent data also indicates transaction values at specialty retailers remain elevated. Canaccord Genuity interprets this to mean customers are being deliberate in their shopping choices, and this should favour specialty retailers over large format department stores.

There was also significant new customer acquisitions for Adairs online when stores were closed. The company, therefore, appears well-placed to continue taking market share across either format.

Sales growth has been significantly stronger than Goldman Sachs expected, amid like-for-like sales growth of 5.3% in stores for the second half to date. The online offering is also strong, accounting for around 30% of pre-pandemic sales and there is an improving supply chain.

Goldman Sachs expects some additional expenses to emerge that reflect the faster ramping up of the store operations and forecasts zero sales growth, like-for-like, in the core stores and 10% online in FY21.

The broker assesses the stock is attractive at current levels and reiterates a Buy rating with a $2.80 target, upgrading estimates by 10-19% for FY20-22. The main risk is a material slowdown after September as JobKeeper and rental relief ends.

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