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Why the Adairs share price slumped 20% this morning

The Adairs Ltd (ASX: ADH) share price has slumped as much as 20.54% this morning after the retailer released a trading update withdrawing guidance and cancelling its interim dividend.

Adairs shares have fallen over 70% from February highs of $2.62 and are now trading at just 75.5 cents at the time of writing, 18.38% lower for the day. 

Trading update & cancellation of interim dividend

This morning, Adairs withdrew its FY20 earnings guidance and cancelled its 1HFY20 dividend of 7 cents per share due to the ongoing uncertainty regarding the duration and impact of the coronavirus pandemic. Adairs emphasised that the cancellation of the dividend was precautionary, reflecting the focus of the Board on maintaining strong liquidity and protecting long term shareholder value. 

Until recently, Adairs and Mocka were delivering pleasing results. For the first 11 weeks of 2HFY20 (up to 15 March) Adairs’ like-for-like sales (excluding Mocka) were up 7.1%. Stores were up 0.7% and online was up 31.8%. Mocka like-for-like sales were up 18.1% over the same period. 

All Adairs stores and both Adairs and Mocka online platforms remain open. Offshore suppliers are now largely operational and weekly inventory shipments are now arriving in both Australia and New Zealand. In the ordinary course, Adairs stock levels are healthy. The current range has performed well, including in significant recent promotional events, despite the rising uncertainty over the course of Q3. 

Response to change in conditions

Nonetheless, the outlook for Q4 has now changed materially. The level and nature of uncertainty in relation to medium-term trading conditions are unprecedented. In response to the recent change in trading conditions and elevated uncertainty in relation to future trading, Adairs is actively managing its capital position. 

Management is taking action to maximise near-term sales, reduce costs, manage working capital and defer non-essential projects. Adairs is also working with its landlords to agree on sustainable occupancy agreements through this period. 

As part of cash management planning in light of ongoing uncertainty from coronavirus, Adairs has decided it would be prudent not to proceed with the previously announced dividend. Whilst the Adairs Board is confident in the financial position and prospects of the company, it feels it is prudent to ensure cash is preserved until current uncertainties are better understood and can be successfully navigated. 

Adairs is in a reasonable financial position with cash on hand of $16 million, net debt of $48 million, undrawn term debt of $26 million and working capital facilities of $6.5 million. The term debt facilities do not mature until March 2023 and the working capital facilities are annually renewable with the consent of the relevant financier. 

Adairs has no further cash payments due in relation to the Mocka acquisition until September 2021, and this payment is contingent on the performance of the Mocka business. 

Adairs CEO Mark Ronan commented, “we are reviewing the impact COVID-19 is expected to have on our trading performance and taking immediate actions to best position the business to navigate the emerging circumstances.”

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Motley Fool contributor Kate O'Brien 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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