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Adairs share price soars 5% on strong 1H20 results

The Adairs Ltd (ASX: ADH) share price has pushed 5.5% higher to $2.53 in early trade today following the release of the homewares company’s 1H20 earnings release. Investors appear to be impressed with the result which showed record sales and profit.

What did Adairs announce?

Adairs reported sales growth of 8.6% to $178.9 million with like-for-like (LFL) sales up 6.9%. This included online sales growth of 31.6% to $31.6m which now makes up 18% of total sales. Meanwhile, store sales grew 4.9%, or 2.4% on a LFL basis. This sales growth was noted to be driven by strong performance across core categories and ongoing growth in the key areas of Adairs Kids and Home Decorator.

Gross profit was seen to rise 9% to $109.3 million with gross margin increasing by 20 basis points to 61.1%. Underlying earnings before interest and tax (EBIT) was up 4.2% to $23.2 million while net profit after tax (NPAT) also 4% to $15.7 million on a pro forma basis.

The weaker AUD during the period was fully offset through sourcing initiatives, review of price points and a reduced depth of discount. Adairs also noted that its hedging policy has been reviewed and extended to cover for the following 18 months. This was explained to reduce margin volatility and provide more time for the business to make adjustments in response to a weaker AUD.

Adairs also reported an increase in its cost of doing business (CODB) of 10.7%, with its CODB sitting at 46% as a percentage of sales. These increased costs were associated with the company’s growth in online sales (postage/merchant fees/wrap and pack), a continuation of interim supply chain measures and investment initiatives to support future growth. This future growth includes a digital platform and enhancement of executive leadership across key growth areas.

Dividend

Adairs announced a dividend for the first half of 7 cents per share, fully franked. This was an increase of 7.7% over the prior corresponding period and is to be paid on Thursday, April 16.

There was no change to Adairs’ dividend policy to pay 60% – 85% of NPAT.

Mocka acquisition

Adairs acquired online retailer Mocka in December 2019 for an initial purchase price of NZD$81.8 million. A$53.2 million of this was paid upfront through a combination of cash and shares funded via an extension to its group term debt facility.

The remaining 35% of the purchase is deferred and dependant on future Mocka earnings. This is set to be paid out across the course of FY21 and FY22. 

This acquisition was noted to increase Adairs’ exposure to New Zealand with an opportunity to open further stores.

Investing for growth

Adairs opened 5 new stores in 1H20 and completed two refurbishments including one upsized store. The Mark Tuckey brand was also acquired as part of a long term collaboration initiative.

Continued investment is expected in the second half to support further growth initiatives. These include digital capabilities, and continued store roll-out and upsizing across Australia and New Zealand

Outlook

Adairs noted that for the first 7 weeks of 2H20, it generated LFL sales growth of 2.3% and LFL gross profit growth of 8.5%.

The company expects to open 1-2 new stores and upsize 3-5 existing stores across Australia and New Zealand. It has also reiterated its FY20 sales guidance of $400 million to $415 million based on a pro forma full-year contribution from Mocka.

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Motley Fool contributor Michael Tonon has no position in any of the stocks mentioned. 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 Scott Phillips.

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