Adairs share price suffers 14% sell-off on 'challenging' FY23 result, dividend cancelled

Sales are suffering in the current economic environment.

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The Adairs Ltd (ASX: ADH) share price has dropped 13.73% in early reaction to the company's FY23 report.

The ASX retail share closed on Friday at $1.675 a share and at the time of writing, the company's share price has dropped to $1.445.

The homewares and furniture retailer has just reported its results for the 52 weeks ended 25 June 2023.

Adairs share price falls on weakening conditions

  • Group sales up 10.1% to $621.3 million
  • Gross profit increased 5.8% to $285.5 million
  • Underlying earnings before interest and tax (EBIT) declined 16.4% to $63.9 million
  • Statutory net profit after tax (NPAT) down 15.7% to $37.8 million
  • No final dividend
  • Net debt reduced $20 million to $73.6 million

Adairs brand sales rose 2.9% to $430.8 million, with store sales rising 7% to $314.2 million and online sales dropping 6.7% to $316.6 million.

Focus on Furniture sales grew 5.3% (on a 52-week basis) to $141.9 million, with store sales increasing 9% to $132.1 million but online sales falling 27.7% to 9.8 million.

Mocka, the online business, saw sales decline by 24.1% as shoppers returned to physical stores following COVID-19. But the company said the second half was stronger, with a 550 basis point increase to the gross profit margin compared to the first half of FY23.

Adairs commented that its overall margins were impacted by warehousing and supply chain costs. This is partly why the company decided to take in-house the operations of its national distribution centre from 6 September 2023 in a bid to improve the customer experience and reduce costs. Warehouse costs were up 16.2% yet the national distribution centre was operating at lower volumes and at a higher cost than expected.

Costs also increased due to higher wages, more expensive rent (including the removal of COVID-related rent rebates), and higher utilities costs.

What else happened during FY23?

Adairs decided not to pay a dividend because of the capital commitments required to take over the operations of the distribution centre and the "importance of maintaining a strong balance sheet", which the board called a "prudent decision".

The ASX retail share said it would outlay around $20 million to acquire warehousing operating assets from DHL, install a new warehouse management system, and implement the transition. The full transition is expected to take 12 months, but save on annual costs to the tune of $4 million in 2024 compared to the current operating model. The payback is expected to take four years.

Management said this cost was close to what it would have spent if it had operated the facility from the start. The Adairs share price rose more than 5% on the day of that announcement.

During the reporting year, the company opened two new Adairs stores, upsized four stores, refurbished two stores, and closed three stores, delivering a 2.2% increase in gross lettable area.

What did management say?

Adairs managing director and CEO Mark Ronan said:

In a trend seen by virtually all retailers, sales slowed towards the end of the year as rising interest rates and broad cost of living pressures saw households tighten their budgets.

In a tougher trading environment, the combination of exclusive product, engaged customers, attractive price points and strong service culture sees us well placed to maximise sales in the coming year. This focus, combined with the operational improvements made in FY23, cost reductions across all brands and disciplined inventory management sees us well placed to maximise results in FY24.

What's next for Adairs?

FY24 could be a very fascinating year for the Adairs share price as economic headwinds hit the business. Indeed, the market has already sent the company's market capitalisation down this year — and significantly since its peak in June 2021.

Management said the near-term outlook is "challenging" so it has implemented "material cost reduction initiatives that seek to manage the business appropriately for the prevailing and anticipated trading environment". The company says it's endeavouring to do this while "preserving a strong service culture and ensuring each brand continues to delight customers with new and unique product[s]".

The company also gave a trading update for the first seven weeks of FY24.

Group sales were down 8.9%, Adairs brand sales were down 8.5%, Mocka sales were down 5.2%, and Focus sales were down 10.9%. Adairs said margins have been "carefully managed" despite the weaker trading environment, with group margins "ahead" of last year.

The business also said there is a solid pipeline of new stores, with a preference for larger, more profitable stores.

It didn't provide any financial guidance.

Adairs share price snapshot

Prior to today's report announcement, Adairs shares were down 26% in 2023 while the ASX 200 was up around 3%.

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. 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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