The Adairs Ltd (ASX: ADH) share price roughly halved in the 2022 financial year in what was a tough time for shareholders.
Despite that decline, the business is only back to where it was two years ago. Even so, that may not give much short-term comfort for investors that bought shares above $3 a share.
Adairs is a homewares and furniture retailer through three brands – Adairs, Mocka and Focus on Furniture.
Adairs has a national store network, Focus on Furniture has plans for a national store network and Mocka specialises as an online retailer.
Lockdowns and lower profitability
The first half of FY22 saw group sales of $241.8 million, including a $12.5 million contribution from Focus. Excluding Focus, online sales rose 8.2% to $97.6 million, contributing over 40% of total sales.
While sales largely held up, profitability sank. Underlying earnings before interest and tax (EBIT) was $32.9 million, which included a $2.9 million contribution from Focus. That underlying EBIT compares to $60.2 million in the prior corresponding period.
However, Adairs explained there were several hits to EBIT due to COVID-19. The company estimated that there was a $15 million hit due to Adairs' COVID-19 store closures. There was an estimated $2.5 million EBIT hit because of warehousing disruptions and a $1.4 million hit because of Australian courier disruptions.
However, compared to the first half of FY20, Adairs' underlying EBIT was 45% higher.
Profitability can be an important factor for the Adairs share price and most other businesses.
The last trading update that investors have seen was for the first seven weeks of the FY22 second half which showed total sales were up 33.8% – but this was essentially because the sales of the acquired business Focus are now being included.
In those first seven weeks, Adairs store sales were down 1.8%, Adairs online sales were up 9.7% and Mocka sales were up 14.8%.
The outlook can have a material impact on the Adairs share price. In terms of the outlook, as of February 2022, Adairs said:
All group brands have good in-country stock levels and clear opportunities for growth through the second half of FY22. The macro-economic environment is supportive with strong employment and emerging wages growth. Subject to no adverse COVID-19 development occurring management are confident about the prospects for the group in the FY22 second half and beyond.
Profit and dividend expectations
Looking at the earnings projections on CMC Markets, Adairs is expected to make 29.9 cents of earnings per share (EPS) and also pay an annual dividend per share of 18.2 cents.
Those numbers put the Adairs share price at under 8 times FY22's estimated earnings with a possible grossed-up dividend yield of 11.3%.
Time will tell how inflation and rising interest rates impact demand for Adairs' products, its profit and the valuation.
