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Why the Adairs (ASX:ADH) share price just raced to a record high

A happy shopper with lots of bright shopping bags, indicating a positive surge for ASX retail share price
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The Adairs Ltd (ASX: ADH) share price is shooting higher on Tuesday.

In morning trade the furniture retailer’s shares are up 5% to a record high of $4.33.

Why is the Adairs share price shooting higher?

Investors have been buying Adairs shares today after the release of a strong half year result.

For the six months ended 31 December, the company reported a 34.8% increase in group sales to $243 million. This was driven by a 20.9% increase in Adairs sales, a 44.4% jump in Mocka sales, and strong online sales growth.

Thanks to a significant expansion in its gross margin, Adairs reported a 166% increase in underlying earnings before interest and tax (EBIT) to $60.2 million. This doesn’t include a $6.1 million JobKeeper benefit which the company plans to return to the government.

On the bottom line, Adairs reported an underlying net profit after tax of $41.9 million, up 174% over the prior corresponding period.

In light of this strong profit growth, the Adairs board declared a fully franked interim dividend of 13 cents per share. Last year’s interim dividend was cancelled due to COVID-19.

At the end of the period, the company had cash of $22.1 million. This compares to net debt of $1 million at the end of June.

How did its segments perform?

Both its Adairs and Mocka businesses performed very positively during the first half.

The Adairs business delivered total sales of $215 million, up 20.9% on the prior corresponding period. This was driven by a 95.2% increase in online sales to $62.2 million and a 4.6% lift in store sales to $152.8 million. The latter was achieved despite 43 Greater Melbourne stores being closed for ~82 trading days. This represents 45% of their total trading days in the first half.

The Mocka business reported sales of $28 million for the six months. This compares to a four-week contribution of $2.4 million in the prior corresponding period. While not a true comparison, if you were to extrapolate that $2.4 million over a 26-week period, it would come to $15.6 million. Based on this, Mocka would have achieved sales growth of 79.5%.

Also growing strongly was the company’s Linen Lover loyalty program. Its membership numbers now exceed 900,000. Management notes that this is a big positive as members are highly engaged, visit more often, and spend more each visit than non-members. Linen Lover members now account for 75% of Adairs sales.

Outlook

Adairs has started the second half strongly. It advised that sales during the first seven weeks of the half are well ahead of the prior year.

Adairs online sales were +65.9%, Mocka +48.6%, and like-for-like store sales were +12.4%. Positively, gross margins in both businesses remain elevated and in line with the first half.

Management commented: “COVID-19 continues to encourage strong spending in home improvement and home decoration, and we expect this behaviour to persist whilst COVID-19 uncertainty continues. While current trading remains strong, due to the ongoing uncertainty relating to COVID-19 the Board does not consider it appropriate to provide guidance for the FY21 full year at this time.”

It also explained: “Stock flow from China and South East Asia remains inconsistent due to international shipping disruptions across the region. However, our plans have been adapted to accommodate delays without a significant impact on our ranging or customer experience.”

Following today’s gain, the Adairs share price is up 30% since the start of the year.

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James Mickleboro 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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