Why the Adairs Ltd share price rocketed 34% higher today

The Adairs Ltd (ASX: ADH) share price is on course to make it two days of strong gains in a row.

In morning trade the retailer’s shares are up a whopping 34% to $1.27. This brings its two-day return to almost 40%.

Why have they skyrocketed?

Yesterday’s sizeable gain related to a positive research note out of Goldman Sachs which revealed that its analysts felt the market was undervaluing the home wares and home furnishings retailer’s core business.

Analysts at the investment bank slapped a buy rating and $1.10 price target on its shares as a result.

Well it appears as though Goldman was spot on with its call. This morning Adairs released a very positive trading update which showed a significant improvement in its performance.

According to the release, its sales performance continued to improve as the second-half progressed and new product arrived in store.

As a result, management has updated its full-year guidance. Total sales for the second-half are expected to be $140.4 million, representing an 8.3% increase on the prior period.

This means that full-year sales will come in at the top of its guidance range at approximately $264.9 million. Previous guidance had been for sales between $255 million and $265 million in FY 2017.

Should you invest?

Whilst it isn’t the bargain buy it was a couple of days ago, based on Goldman’s FY 2018 estimates, at 11x forward earnings its shares are still great value for money if the company’s turnaround strategy is successful.

This could make it a good option for investors that are looking for exposure to the retail industry. Whist I would still pick retailers such as Premier Investments Limited (ASX: PMV) and Nick Scali Limited (ASX: NCK) ahead of it, I do think it is worth considering today.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Premier Investments Limited. 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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