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Why the Adairs share price crashed 21% lower today

It has been a very disappointing finish to the week for the Adairs Ltd (ASX: ADH) share price.

In afternoon trade the home furnishings retailer’s shares have crashed 21.5% lower to a 52-week low of $1.43.

Why is the Adairs share price crashing lower?

Investors have been heading to the exits in their droves after the retailer released a trading update which revealed that it has experienced a sudden and severe deterioration in its performance over the last few weeks.

According to the release, up until May 27 the company’s like for like sales growth in the second half was +9%.

However, since then the company has observed an adverse change in its trading momentum, with significant volatility observed week to week. This has resulted in the company’s like for like sales being flat since May 27.

In light of this, gross margin pressure, and a continuation of elevated distribution costs, management no longer expects to achieve its full year guidance.

Instead, the company expects total sales of $340 million to $345 million instead of $340 million to $355 million.

And with its gross margin guidance narrowed downwardly to 59% to 60%, management expects earnings before interest and tax of $42.5 million to $44 million instead of $46 million to $50 million.

Adairs’ CEO, Mark Ronan said: “While the need to revise our guidance is disappointing, a review of our FY19 performance shows that we have a healthy and growing business. However, we have specific issues to address to improve our supply chain capacity, productivity and efficiency.”

He added: “We are comfortable that our current inventory position and cash generation are in line with our internal plans. However growing pains within our distribution network are adversely impacting our earnings performance. This coupled with the recent significant change in our sales performance in Australia, has necessitated a revision to our FY19 earnings guidance.”

Further details including its plans to address the supply chain challenges and the outlook for FY 2020 will be released with its full year results in August.

In the meantime, Adairs continues to search for a new chief financial officer after Ms. Mandy Drake resigned unexpectedly on May 29.

Today’s news appears to have spooked shareholders of other retailers such as Myer Holdings Ltd (ASX: MYR) and Super Retail Group Ltd (ASX: SUL). Their shares are down 3.5% and 2.5%, respectively, this afternoon.

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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.

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