Why was May such a shocker for the Adairs share price?

Investors are pricing in further downside for consumer cyclicals.

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Key points

  • Shares in Adairs finished down in the red during May 
  • Retail stocks have failed to resurge in 2022 despite consumer spending reaching its highest mark in some time 
  • In the last 12 months, the Adairs share price has slipped 52% into the red 

Shares of Adairs Ltd (ASX: ADH) closed down in May and finished more than 16% in the red. At the time of writing, the Adairs share price is trading at $2.28.

After nudging past $4.05 in early January, the stock has cratered and formed a series of new lows, as seen below.

TradingView Chart

Murderous May for Adairs

Adairs shares traded sideways from the period of February–April. By the end of May, sellers had pushed prices to a 52-week closing low of $2.32.

However, zooming out, the downside had been in full force over the previous 12 months, along with weakness in the broad sector.

The S&P/ASX 300 Retailing Index (AXRTKD) has followed a similar fate, tumbling more than 22% in the last year. It also closed 6.5% down in May.

Despite a positive retail outlook in 2022 due to diminishing impacts of COVID-19 and record retail sales of $34 billion in April 2022, KPMG says in writing: “it’s not all beer ant skittles”. That’s because retailers face a series of additional headwinds related to supply chain and cost inflation.

The Producer Price Index (PPIs) rose 1.6% this quarter and has climbed around 5% in the past 12 months, according to the Australian Bureau of Statistics (ABS). It has also spiked more than 8.4% since March 2018.

It measures the price change/inflation of products, goods and services for producers. Whereas the Consumer Price Index (CPI) measures the same for consumers.

Since 2017, both indices have curled up. However, since the pandemic, both have really shot north at a rapid pace, as seen below.

TradingView Chart

Similar trends appear to have swept through the US and retailers there have experienced symptoms such as inventory overbuild, cost pressures and consumer spending shift.

Evidently, investors appear to be pricing in similar risks for ASX retail and consumer cyclical stocks. It’s now a question of how well companies either absorb these pressures into their margins, or pass them onto consumers.

Plus, Adairs already realised a slowdown in sales and earnings in its latest filings.

Group sales were down 50 basis points from 1H FY21, whilst pre-tax earnings also took a hit due to operational disruptions related to COVID-19.

This is despite Australian Consumer spending increasing to its highest level in two years, per Trading Economics data.

In the last 12 months, the Adairs share price has slipped 52% into the red.

Motley Fool contributor Zach Bristow 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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