Adairs Well Positioned For Christmas Trade

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Over the course of the pandemic Adairs has gained market share in the home furnishings sector through a combination of both in-store and online growth. Is this sustainable?

-Gains market share through acquiring new customers
-Pulling forward of demand less a risk for Adairs
-Stock trading at a discount to retail peers
 

By Eva Brocklehurst

Adairs ((ADH)) continues to be a beneficiary of the emphasis on domestic consumption brought about by the pandemic and has achieved robust sales growth in home furnishings despite shortages of inventory.

Wilsons highlights continued gains in market share through the company's omni channel strategy, with a combination of in-store and online growth occurring, underpinned by a loyal customer base.

Morgans understands online growth is coming from both new and repeat customers and retaining the new customers will be important for when demand ultimately normalises. The broker upgrades FY21 forecast by 15% and lifts FY22-23 by a modest 4%, noting the recent re-opening of Melbourne has meant in-store sales have bounced back quickly.

Canaccord Genuity suspects the past six weeks are a "glimpse" of what the re-opening of physical stores may provide for the company. Understandably, online sales growth, while still strong, has decelerated during the last couple of months as the shift back to stores occurred.

The broker does not believe this is a pulling forward of demand but evidence that Adairs has gained market share by acquiring new customers and these customers are prepared to shop in store when they have the option to do so.

UBS agrees any pulling forward of demand is less of a risk for Adairs given the company will be cycling lockdowns in the second half of FY21, and incremental earnings margins for stores are higher so this should be a tailwind as sales recover.

The broker factors in a sustainable earnings margin uplift and reflects longer-term forecasts in its numbers rather than the current volatile conditions, maintaining a Buy rating with a $4.20 target.

Sales guidance for the first half is $235-245m with earnings (EBIT) guidance of $62-66m, including JobKeeper benefits. Around 12.2% total sales growth is expected in the second half as trading normalises. Gross margins are expected to normalise to 60.9% in the second half.

Canaccord Genuity observes Adairs performed well during the November Linen Lovers campaign, which had been particularly successful in 2019. Adairs inventory is back to plan and this positions the business well for Christmas trade. Moreover, a recent rally in the Australian dollar bodes well for elevated gross margins to continue.

Mocka

Wilsons is encouraged by the first year of owning Mocka, the company's furniture division, even as the inventory position remains below par leading into the holiday period. Demand continues to outstrip supply and the broker, retaining an Overweight rating and $4.13 target, anticipates Mocka could deliver earnings upside for Adairs.

As inventory normalises, UBS also believes accelerated investment in Mocka could drive a re-rating, noting inventory was the main reason why sales growth at Mocka decelerated to 42% in November/December from 48% in July-October.

Upside Momentum

Morgans envisages more upside as brand awareness builds and the company invests in stock and resources. Furthermore, upside to the current valuation will be demonstrated by the ability to ensure heightened earnings levels are sustainable.

In the meantime, as confirmation could be 6-12 months away, the broker notes the balance sheet provides opportunities to pursue additional acquisitions and retains an Add rating with a $4.00 target.

Canaccord Genuity assesses Adairs has managed to differentiate at the expense of other participants in the category such as department stores and this provides an opportunity to cement its position going forward.

The broker, retaining a Buy rating and $4.60 target, suspects the muted response in the share price to recent upgrades from the company reflects some scepticism that the following year's earnings will be eclipsed by FY21.

At the current share price UBS estimates the market is valuing Adairs in-store business at around 4x FY22 earnings, and relative to discretionary retail peers it continues to trade at a large discount. The value of the online business is further validated, in the broker's view, by the recent acquisition by Kogan.com ((KGN)) of NZ online pure retailer Mighty Ape.

See also, Heightened Potential For Adairs Online on October 27, 2020

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