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Adairs Ltd bombs on shock profit downgrade

Shares in homeware retailer Adairs Ltd (ASX: ADH) fell out of bed this morning after the company revealed that bedlinen and other sales were trading below company expectations for the first four months of financial year (FY) 2017.

The company has updated its FY17 sales guidance to between $265 million to $275 million from $275 million to $285 million on a gross profit margin range of 58.5% to 60.5%, compared to prior forecasts for a gross profit margin between 60% to 62%.

The downgrade was partly blamed on increased discounting as demand for bedlinen categories in particular fell, while general online sales were also below expectations due to “a temporary pullback in online marketing” according to the company.

The falling sales and margins have combined to deliver a 40% share price plunge this morning with the company now expecting profit and earnings per share to come in around 15% lower than the prior year.

To significantly downgrade earnings guidance only four months into the financial year also suggests that management were too optimistic in their original forecasts and the big share price falls probably reflect the market’s dislike of the downgrade being blamed on the bedlinen.

Like Harvey Norman Holdings Limited (which reported yesterday) homeware retailers are leveraged to consumer confidence and strength in the local housing markets so investors in the stocks would need to remain confident in Australia’s macro outlook. The potential for rising interest rates 12 to 18 months from now could for example put a dent in consumer confidence, housing markets, and overall group sales.

Still, selling for $1.53 this morning the stock trades on just 9x trailing earnings, but investors need to factor in the new guidance for a 15% fall in EPS in 2017. On that basis it is probably on around 11x estimated forward earnings and I expect the stock will remain flat until the company reveals its half-year results in February 2017.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find him on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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