The Adairs Ltd (ASX: ADH) share price has dropped by around 24% since the middle of June 2021. Why is this happening?
Adairs is one of the country's largest retailers of homewares and furnishings. It sells its products through both stores and online.
Why has the Adairs share price fallen?
Only the buyers and sellers of Adairs truly know why they traded at a lower price compared to a few months ago.
It may or may not be a coincidence that the Adairs share price started falling close to the date when Sydney started experiencing an outbreak of the Delta variant of COVID-19 which led to months of lockdowns and store closures in Sydney and subsequently Melbourne.
The first time the market got a trading update was when the company revealed its FY21 result.
At the time, it said that in the first seven weeks of FY22, like-for-like sales (excluding the closed stores) were up 5.2% on FY21 and up 50.5% on FY20. However, total group sales for the first seven weeks were 11.7% lower than FY21 due to the COVID-related store closures. In dollar terms, after seven weeks its total group sales were approximately $7 million behind the prior year because of the store closures. Store sales were down 27%. However, Adairs online sales were up 12.9% and Mocka sales were up 16.1%.
What's the situation now?
The Adairs share price is close to the lowest it has been over the past six months.
It was only last week that the company gave a trading update at its annual general meeting (AGM).
Sales somewhat improved in the following weeks. Adairs said that for the first 16 weeks of FY22, total sales were down 8.5%, though like for like sales were up 8.2%. The company attributed the decline to the widespread store closures in NSW, Victoria, the ACT, and Auckland, which reduced the number of store trading days by around 47%. But those store closures are now coming to an end.
Adairs' store sales were down 27.3%. Even the open stores saw a decline of 3.8%. However, Adairs' online sales rose by 15% and Mocka sales grew by 25.8%.
Management estimated the total value of sales lost because of the store closures was between $28 million and $32 million, which is net of the estimated sales benefit capture in the Adairs online channel.
The earnings before interest and tax (EBIT) impact of these lost sales is estimated to be between $12 million and $15 million.
Will things turn around?
The Adairs share price (and any share price) is unpredictable.
However, the company noted the majority of NSW stores re-opened on 11 October 2021 and in their first week delivered "strong" like-for-like sales growth over the corresponding week in FY21.
Management said the NSW experience bodes well for the re-opening of its Victorian metro stores in early November which is an important trading period leading up to Christmas.
Adairs anticipates that pent-up demand, combined with the current online delivery delays, will encourage customers to shop in stores.
However, the gross profit margins have moderated from the record levels achieved in FY21, but are expected to remain above FY20. Global supply chain conditions have resulted in increases in freight and other sourcing costs that are placing extra pressure on the gross profit margin.
Adairs share price valuation
According to Commsec, the current Adairs share price is valued at 11x FY22's estimated earnings.
