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Will the Adairs share price survive in the age of Amazon?

There is no denying that online retailers such as Amazon.com, Inc. (NASDAQ: AMZN) and Kogan.com Ltd (ASX: KGN) will give consumers more options and put pressure on margins.

Generally speaking, Australia’s brick and mortar retailers should be in a better position than their US counterparts, due to their smaller per capita shopping footprint. The threat of competition is causing a number of retailers to trade on discounted multiples, which could present valuable entry points for selective investors.

Is Adairs Ltd (ASX: ADH) one such retailer?

According to the Adairs website, the company “is a leading specialty retailer of home furnishings in Australia with a national footprint of stores across a number of store formats. With vertically integrated product design, development, sourcing, distribution, and retail operations, approximately 90% of Adairs’ range is sold under its own private brands. The company also has an online store and loyalty program called “Linen Lovers”.”

Revenue growth

For the half to 31 December, Adairs posted revenue growth of 10.6%. This comprised of a 7.3% increase in same-store sales and the addition of 4 stores to the network. Online sales are critical to the business staying competitive and grew 42%, bringing online sales to 15% of total sales. NPAT grew by 9.1%.

Management reduced its November full year guidance ranges by $5 million for revenue and $1.5 million for EBIT. Management stated: “The moderation of our EBIT guidance range relates primarily to the expected impact of the depreciating AUD and a potentially more challenging consumer environment.” Pleasingly the gross EBIT margin was unchanged.

Insider ownership

Adairs has significant insider ownership. Insiders own 19% or approximately $58 million of the company’s shares. This is a positive sign, as it shows that the people making decisions have their interests directly aligned with shareholders. I prefer this type of alignment to performance targets, as it tends to focus management over a longer time horizon.

Broker buy ratings

In the month of February, both Goldman Sachs and UBS analysts had a buy rating on the stock. Goldman believes that the company can do well despite a softer macro environment and links to a weaker property market. UBS is impressed with the company’s omni-channel approach, which is driving solid sales growth both online and in-store. Unspecific to Adairs, UBS has noted that the growth of “buy now, pay later” services may have fuelled a one-off benefit to retail spending.

Foolish takeaway

With an undemanding valuation of 10x earnings, I believe that Adairs could be a solid choice for income investors. A 7.67% fully franked dividend (or 11% grossed up) yield is much better than anything you’re going to get in the bank. Increased competition means that the company will likely need to invest in itself. Investors should monitor the company’s free-cash-flow, to ensure that it can continue to pay such a healthy dividend.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Proutlb95 has no position in any of the stocks mentioned and expresses his own opinion. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon. The Motley Fool Australia has recommended Amazon and Kogan.com ltd. 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.

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