Adairs is well-positioned for profitable growth as sales margins improve and costs contained

About Adairs Limited

Adairs Limited (Adairs, the Group, ASX:ADH) is Australia’s s largest omnichannel specialty retailer of home furnishings and home decoration products. The Group operates an omnichannel retailing strategy that seamlessly combines in-store shopping with the convenience of on-line marketing and ordering to deliver a superior customer experience.

Listed on the ASX since June 2015, Adairs commenced business in the early 1900s on Chapel Street, Prahan in Victoria before establishing itself as a small format department store in Camberwell, retailing Manchester curtains and haberdashery. In 1981 the first modern Adairs boutique was opened in Doncaster Shoppingtown, and today it operates in Australia and New Zealand through a network of 170 stores.

Improved gross margin offsets lower sales

Adairs is well-positioned for profitable growth after growing gross margins across all three brands by 220 basis points despite a 10 percent drop in sales revenue to $291 million for the December 2023 half-year. Profit after tax came in 19 percent lower at $17.6 million or 10.2 cents per share, down from 12.7 cents per share compared to the previous corresponding period. An interim fully franked dividend of 5 cents per share will be paid on 8 April 2024.

Rigorous cost management has fully offset inflationary pressures from higher wage rates (5.7 percent), rents (5 percent) and utilities (20 percent). These cost savings are likely to be augmented by Adairs resuming operational control of the Group’s National Distribution Centre (NDC) from September 2023, which will also improve supply chain service levels. The estimated cost savings from managing the NDC will be at least $4 million in the 2024 calendar year.

Increased stock turns generated higher cash flows during the half-year of $38 million, being 10.5 percent stronger than the December 2023 half-year. More frequent stock turns have the effect of boosting cash flow despite lower sales and profitability. Higher cash flow has enabled a $15.5 million reduction in net debt over the December half to close at $58.6 million, providing substantial bank covenant headroom. The Group has total finance facilities of $135 million secured until January 2026 ($90 million) and January 2027 ($45 million).

Capital expenditure in the half-year of $22.2 million comprised $12.5 million to acquire the NDC assets as well as new stores and store refurbishment projects. Finalising the NDC capex has cleared the way for the resumption of shareholder dividends.

Trading update and outlook

Customer store traffic remains significantly lower compared to the same period last year and sales for the first eight weeks of FY24 are down 9.6 percent for the Group. Despite the slow start, management are confident that given the material decline in sales in May 2023, the Group’s comparative sales performance will improve across the second half of FY24.

The full amount of FY24 stock purchases have been hedged at A$0.69, and the cost management and supply chain improvement initiatives, planned store rollout and in-house operational management of the NDC, provide levers for profitable growth.