Is the Adairs share price outlook brightening for July?

Should investors make a home for Adairs shares in their portfolio in July?

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Key points

  • The Adairs share price has been rising in recent weeks, it’s up by more than 10% 
  • UBS, a broker, recently reiterated its view that it thinks Adairs is a buy 
  • The broker thinks Adairs is valued at just 7 times FY23’s estimated earnings 

The Adairs Ltd (ASX: ADH) share price has seen a lot of volatility over the past six months. But, with shares going up 12% over the past week, is the outlook looking better for the homewares and furniture business?

Adairs now operates three businesses – Adairs, Mocka and Focus on Furniture. There are question marks about what will happen with the economy considering inflation is elevated and interest rates are rising. How much impact will this have on demand for Adairs? Time will tell.

Let’s look at the latest sales update from the business.

Trading update

The company gave a trading update for the first seven weeks of the second half of FY22. It noted that it had continued to see online growth for both Adairs and Mocka, despite cycling record growth rates in the prior corresponding period. Growth can have an important influence on the Adairs share price.

It noted that store sales softened as customers limited their “discretionary outings” in regards to the COVID-19 variant called Omicron.

Adairs store sales were down 1.8%, while Adairs online sales were up 9.7%. Mocka sales were up 14.8%. While Focus sales were down 7.3% year on year, that comparison was against a period before Adairs’ ownership. Including Focus sales, total group sales were up 33.8%.

In February 2022, which was quite a while ago considering everything that has happened since, Adairs said its businesses have good stock levels and “clear opportunities for growth” in the second half. It also said “the macro-economic environment is supportive with strong employment and emerging wages growth.”

What do brokers think of the Adairs share price?

One of the latest views comes from UBS. It currently has a rating of buy on the business.

UBS has a price target of $3.70 – that’s where the broker believes the Adairs share price could be in 12 months from now. But, remember that UBS (probably) doesn’t have a crystal ball.

If the Adairs share price were to rise to $3.70, that would be a rise of more than 80% over the next year.

UBS is now expecting less revenue from Adairs in the next few financial years as the toughening economic environment is expected to hurt demand. The goal of the Reserve Bank of Australia (RBA) is essentially to reduce demand and bring down inflation by raising interest rates.

However, despite the challenges, UBS thinks that the Adairs share price is good value at the current forward price/earnings ratio.

Using UBS’ estimates, Adairs is valued at 7 times FY23’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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