3 reasons why the Adairs (ASX:ADH) share price could be a buy

There are a few different reasons why Adairs could be worth considering.

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The Adairs Ltd (ASX: ADH) share price could be one to consider after the business released a trading update for the first quarter of FY22.

The last two years have been quite volatile for the homewares, furnishings and furniture business.

For the first 16 weeks of FY22, Adairs said that its total group sales were down 8.5%. However, on a like for like basis – which excludes stores closed for COVID-19 restriction reasons – total group sales were up 8.2%.

The Adairs share price could be an attractive option to consider for a few different reasons:

Continuing online growth

Whilst the headline numbers didn’t show much growth, the online portion continued to show double digit growth.

Adairs online sales were up 15% compared to the first 16 weeks of FY21, whilst it was up 172.8% compared to the same period in FY20. Mocka, which is an online-only furniture business, saw growth of 25.8% year on year and 87.6% against FY20.

Its digital transformation and omni-channel model is a key part of the strategy. The company says that selling online (and offline) gives it a larger total addressable market (TAM), significant synergy across channels, delivers customers a better experience and a more flexible shopping experience.

Adairs continues to invest in winning more customers, improving the customer experience, platform and team.

The company is upgrading its online platform to deliver a more seamless omni-channel customer experience in 2022.

Linen Lover membership

Adairs says that there is a relationship between total sales and Linen Lovers membership levels. Growth here is a key driver of sales.

Management believe that member retention initiatives and the facilitation of online sign-ups through the upgrade of its digital platform in FY22 offer “significant upside” to its growth.

Members account for more than 80% of total Adairs sales and spend more than around 1.5 times more than non-members with each transaction.

Each new member adds around $400 in total sales.

Average annual growth in membership numbers over the last five years was 14.5%. It’s aiming to continue to grow Linen Lover memberships by 10% to 15% per annum.

Both this and the next point could be helpful factors for the Adairs share price over time.

Retail floor space

There is also a relationship between store sales and retail store floor space.

New and up-sized stores are expected to continue to drive store sales. The company outlined that each additional square metre of floor space typically adds around $4,000 in store sales.

Average annual growth in floor space over the last five years was 7.5%.

The company is expecting to grow floor space by 8% (or more) in FY22 and then at least 5% per annum in the next five years through new and upsized stores.

Not only do larger stores generate more revenue, but it’s also more profitable. They can showcase more products and categories, with an average increase of the store contribution margin of 950 basis points after the upsizing.

A typical upsized store achieves $250,000 to $350,000 more profit each year after upsizing, representing around 60% average increase in store contribution.

Management believe profitable new store opportunities remain.

What is the Adairs share price valuation?

The earnings estimate on Commsec suggests a profit decline in FY22. Despite that, Adairs shares are forecast to be valued at under 12x FY22’s estimated earnings.

Should you invest $1,000 in Adairs right now?

Before you consider Adairs, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Adairs wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended ADAIRS FPO. The Motley Fool Australia owns shares of and 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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