'Assume control': Why the Adairs share price is leaping 5% today

The retailer has announced a strategic decision that could improve customer experience and save it money.

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The Adairs Ltd (ASX: ADH) share price is climbing today despite the consumer discretionary sector underperforming the S&P/ASX 200 Index (ASX: XJO).

Nearing the August interest rate decision, shares in the homewares retailer are up 5.29% to $1.79. Meanwhile, other ASX retail shares, including Wesfarmers Ltd (ASX: WES) and Harvey Norman Holdings Limited (ASX: HVN), have barely budged.

Investors are paying closer attention to Adairs today amid an update from the company.

Money well spent

It looks like Adairs shareholders are cheering about the latest strategic decision made by the company. The bedding and furniture seller will bring its distribution operations in-house after outsourcing to a third-party failed to meet expectations.

According to the update, Adairs will take over operational control of its National Distribution Centre (NDC) from 6 September 2023. This move was agreed upon with the current third-party logistics (3PL) provider, DHL Supply Chain Australia.

In the update, Adairs details the reason for making this decision, stating:

The operational outcomes at the DHL-operated NDC since its commissioning in September 2021 have been below expectations which has adversely affected customer experiences and resulted in operating costs well in excess of the business case and the costs incurred by Adairs prior to moving to the NDC.

Furthermore, Adairs noted that DHL had improved during the last six months. However, the service levels remained below the retailers' requirements. As such, the ASX-listed company has exercised its 'step-in' rights to assume control of the facility.

The move is not without its costs. According to the update, around $18 million will be spent over the next year to enact the shift. This capital expenditure covers the acquisition of all warehouse operating assets and the replacement of the existing DHL IT and management systems.

Adairs believes the changes will result in $4 million worth of annual cost savings in the first year. Further savings are expected in the following year as it migrates to a new warehouse management system. The company expects payback within four years.

Another positive for the Adairs share price

At a broader level, the latest consumer confidence data could be aiding Adairs shares today. The latest survey might hint at more resilient consumer spending than previously expected.

According to the ANZ-Roy Morgan survey, consumer confidence strengthened 3.2 points to 78.4 this week, reaching its highest level since April. This means consumer confidence has improved by 8% in the last two weeks. It marks the biggest two-week improvement since the pandemic era of April 2020.

More positive consumer sentiment could bode well for retailers. People who are more comfortable with their financial circumstances are more inclined to spend money at stores such as Adairs.

Despite today's gain, the Adairs share price remains 27.8% below where it was a year ago.

Motley Fool contributor Mitchell Lawler 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, Harvey Norman, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Adairs, Harvey Norman, and Wesfarmers. 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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