Why the Adairs (ASX:ADH) share price has rocketed up 13% today

The Adairs Ltd (ASX: ADH) share price is rocketing higher today after the company announced a strong business update for first half FY21.

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The Adairs Ltd (ASX: ADH) share price is rocketing higher today after the company announced a strong business update for the first 23 weeks of the 2021 financial year. In opening trade, the Adairs share price shot up 13.3% higher to $3.65, but has since retreated to $3.42, up 6.21%, at the time of writing.

What’s driving the Adairs share price higher

For the period ending 6 December, Adairs reported a robust result across all channels of its business. Despite COVID-19 closing down 43 Melbourne metropolitan stores for 3 months during government restrictions, the company managed to outperform expectations.

Compared to the prior corresponding period, Adairs saw growth in all key metrics. Most notably, its online division recorded a 99.7% increase in sales, which accounted for 39% of total group sales.

While Adairs’ physical stores saw a marginal 5.2% lift, like-for-like sales growth jumped 17.3%. This reflected continued consumer demand across its store network.

Its online furniture business Mocka achieved a 45.1% rise in sales over the comparable period.

Adairs advised that gross margins are tracking well above FY20 levels, with pricing, promotion and sourcing measures implemented.

The company’s inventory levels for its Adairs brand are prepared for the Christmas holiday period.

However, its Mocka inventory levels remain below plan due to the surge in sales that was not foreseen by the company. In addition, longer product lead times has hampered in getting stock more readily available.

First half FY21 guidance

In light of the strong performance achieved, the board decided to provide investors with an earnings guidance for the first half of FY21.

Group sales are anticipated to be somewhere between $235 million and $245 million. In comparison, Adairs achieved $179 million in group sales for 1H FY20.

Underlying group earnings before interest and tax (EBIT) is forecasted to reach $62 million to $66 million. Again, in first half FY20, underlying group EBIT saw $23.2 million realised.

What did management say?

Adairs CEO and managing director Mark Ronan welcomed the positive update, saying:

With a few weeks to go, it is now clear our first half FY21 result will be outstanding and builds on the excellent result in FY20.

Whilst we have clearly been a COVID-19 beneficiary, the result has been delivered through the team’s strong execution against our articulated business strategies and the fundamental strength of our vertical business model. These gains extend across all aspects of our business with Adairs achieving strong growth through our integrated omni-channel model and Mocka delivering strong results as we continue to build momentum and scale.

For the group to achieve an expected EBIT outcome in six months that exceeds the EBIT of the full prior year, which was itself a record for the company, is testament to the strategic health and operational excellence of our business.

About the Adairs share price

The Adairs share price has gone gangbusters over the last 9 months, leaping 729% from its 44-cent low in March.

Adairs has a market capitalisation of $607 million and a price-to-earnings (P/E) ratio of 17.3.

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Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends ADAIRS FPO. The Motley Fool Australia has recommended ADAIRS FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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