3 key reasons why I think the Adairs share price is a buy

I believe that Adairs shares are compelling at their current price for a number of reasons.

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Key points

  • Adairs is a promising ASX share in my opinion
  • Sales can grow in the longer-term, as the company increases its member base, online sales, and retail floor space
  • It’s also expected to pay a very large dividend yield

The Adairs Ltd (ASX: ADH) share price looks good value to me; that’s why I’d call it a buy.

Adairs is a business that sells homewares and furniture through three different brands – Adairs, Mocka, and Focus on Furniture.

The Adairs share price has suffered in 2022 almost as much as many tech shares. It has fallen around 40% since the start of the calendar year.

I think it’s worth paying attention to the simple advice of ‘buy low, sell high’ at times like this. For a business with a compelling future, I think investors should consider businesses such as these at their lower prices.

These are some of the reasons why I think this ASX share could be a good pick today.

Membership numbers

Adairs says that the growth of its membership program, Linen Lover, is a “key” driver of sales.

The ASX share says that members account for more than 80% of total sales and spend around 1.5 times more than non-members with each transaction.

The business points out that total Adairs sales are highly correlated to the number of members and each new member adds around $400 in total sales. It’s looking to grow the number of members by between 10% to 15% per annum over the next few years.

At its annual general meeting (AGM), Adairs said that member retention initiatives and the facilitation of online sign-ups through the upgrade of its digital platform in FY22 could offer “significant upside” to growth rates. Keeping members will be important for the Adairs share price in my opinion.

Store floor area

There is another positive relationship between store sales and retail floor spare.

The company has said each additional square metre typically adds around $4,000 in in-store sales. Average annual growth of floor space was 7.5% over the last five years. It’s expecting to add at least 5% annually to its floor space in the coming five years.

Upsizing stores is part of the company’s tactic, with larger stores materially more profitable than smaller ones as they can show off more products.

Focus on Furniture also adds to the company’s long-term growth potential. It can increase the number of stores, grow online sales, and Focus on Furniture can benefit from being part of a larger business.

Online sales

The company is focused on being an omnichannel retailer. That means customers can buy however they want – offline or online.

In the FY22 first half, online sales actually made up 43% of total sales. As well, online sales continue to grow across all brands. Total online sales for the half were up 185% compared to the first half of FY20. I think online sales will have an increasingly important influence on the Adairs share price.

While online sales come with delivery costs, it is an effective way to connect with customers and ensure members keep coming back because of their good experience in dealings with the company.

I think it will be the retailers that are effective at e-commerce that will do well in the coming years as more customers do their shopping online.

Dividend yield

The dividend isn’t everything with Adairs, but it’s an attractive bonus to boost returns.

The broker Morgans thinks that the ASX share could pay a grossed-up dividend yield of 11.6% and 15.9% in FY23. Even if the dividend yield were only 10%, that’s still a very attractive income yield in my opinion.

Adairs share price valuation

As an ASX retail share, the business has a pretty low price/earnings (P/E) ratio. If it can grow earnings in the longer-term, I think it can do quite well over time. According to Commsec, the Adairs share price is valued at eight times FY22’s estimated earnings.

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. has positions in and has recommended ADAIRS FPO. The Motley Fool Australia has positions in and has recommended ADAIRS FPO. 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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