Adairs share price falls amid strong first half growth but guidance downgrade

Consumers are returning to this retailer's stores but are neglecting its online businesses…

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Key points

  • Adairs has released its half year results this morning
  • The retailer has delivered solid sales and profit growth
  • However, it has downgraded its earnings guidance for FY 2023

The Adairs Ltd (ASX: ADH) share price is on the slide on Monday morning.

At the time of writing, the homewares retailer's shares are down 2% to $2.32.

This follows the release of the company's half year results this morning.

Adairs share price lower on guidance downgrade

  • Sales up 34.1% to a record of $324.2 million
  • Underlying earnings before interest and tax (EBIT) up 7.9% to $35.5 million
  • Statutory net profit after tax up 23.9% to $21.8 million
  • Earnings per share of 22.2% to 12.7 cents
  • Net debt down 13% since June to $81 million
  • Fully franked interim dividend flat at 8 cents per share
  • Outlook: Earnings guidance downgraded

What happened during the half?

For the six months ended 31 December, Adairs reported a 34.1% increase in sales to $324.2 million.

The key Adairs business reported a 13.1% increase in sales to a record of $220.4 million. Instore sales grew 13.1%, which offset a 7.4% decline in online sales. The former reflects no COVID store closures during the period compared with the loss of 31% of trading days a year earlier.

Also boosting its top line growth was the Focus on Furniture business, which contributed sales of $78.6 million. It was only part of the business for one month in the prior corresponding period, but management estimates that its sales grew 20.1% year over year.

Finally, the company's online brand, Mocka, had a disappointing half and reported a 26.8% decline in sales to $25.1 million. Management notes that this reflects customers returning to stores.

Adairs' margins were under pressure during the period due to inbound container rates and industry-wide increases in delivery charges.

In addition, the new DHL-operated national distribution centre's operational outcomes have been below expectations since becoming fully operational in July. Management advised that this has affected customer experiences and resulted in a significantly higher cost of operation. The two parties are working to resolve these issues and highlight that operational outcomes are improving.

Furthermore, a new price model became effective last month and is expected to reduce average variable costs per unit dispatched by approximately 20% compared to first half levels.

This ultimately led to the company's underlying EBIT growing at a more modest 7.9% to $35.5 million.

Despite this growth, the Adairs board elected to keep its fully franked interim dividend flat at 8 cents per share.

Management commentary

Adairs Managing Director and CEO, Mark Ronan, said:

The first half of FY23 delivered strong sales growth for the Group with customers across our brands preferring to shop in store. The continued Group sales growth highlights the strength of our brands, the critical role of our exclusive product, and the resilience we have seen with the Australian consumer.

Across the brands we are focussed on our operational execution, continued development of exclusive on-trend product and growing our membership bases, putting us in a good position to manage what is likely to be a more challenging trading environment in the second half.

Outlook

Management advised that the first week of the second half saw record Boxing Day sales for both the Adairs and Focus brands. And after seven weeks, group sales are up 1.8% over the prior corresponding period, with growth from Adairs and Focus being offset by a 31.7% decline in Mocka sales.

In light of this, management has reaffirmed its sales guidance for FY 2023 of $625 million to $665 million.

However, it has trimmed its EBIT guidance by $5 million to between $70 million and $80 million. This is due to elevated supply chain costs.

Motley Fool contributor James Mickleboro 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. The Motley Fool Australia has positions in and has recommended Adairs. 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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