The Adairs Ltd (ASX: ADH) share price has been amongst the best performers on the market on Friday following the release of its annual general meeting presentation.
At lunch the home furnishings company’s shares are up 5.5% to $1.98.
Why are its shares climbing higher?
As well as benefiting from improved investor sentiment following a rebound on Wall Street overnight, investors appear pleased with the company’s guidance for the year ahead.
Management has reiterated its guidance of $345 million to $360 million for sales and $47.5 million to $51.5 million for earnings before interest and tax.
At the low end of its guidance range it implies growth of 9.6% and 4.9% respectively, whereas at the high end of its guidance range it would mean year on year growth of 14.3% and 13.7% respectively.
Even based on the low end of its guidance range I think Adairs’ shares are great value given that they are changing hands at under 11x earnings today. In addition to this, they currently offer a trailing fully franked 6.8% dividend.
What are the risks?
I believe the market is concerned that the weakening housing market will have an impact on Adairs’ performance.
Given that it sells home furnishing items, I think it is understandable to be concerned that Adairs could suffer with the likes of Nick Scali Limited (ASX: NCK).
However, it is worth noting that Adairs has yet to see any impact to its business. In fact, it has continued to thrive and recently reported same store sales growth of 5.2% for the first 13 weeks of FY 2019.
In addition to this, the company’s online channel is underpinning its growth and continues to go from strength to strength. Online sales grew 75.1% in FY 2019 to $41.5 million despite the arrival of Amazon in Australia.
And finally, another positive I believe is the success of its Linen Lovers loyalty program. The Linen Lovers loyalty program saw its memberships grow 15% in FY 2018 and now represents over 70% of its total sales. The success of this program appears to be leading to customers returning again and again, keeping them out of the hands of the competition.
Should you invest?
Given its strong start to FY 2019, the low multiples its shares trade on, and its generous dividend, I think that Adairs’ shares offer a compelling risk/reward right now. In light of this, I see them as a great retail option along with Super Retail Group Ltd (ASX: SUL).
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Super Retail Group 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 Scott Phillips.