Adairs Ltd (ASX: ADH) shares are having a disappointing start to the week.
In morning trade, the ASX 300 stock is down a massive 32% to $1.75.
Why is this ASX 300 stock crashing?
Investors have been hitting the sell button in a panic on Monday after the furniture and homewares retailer released a trading update.
That update reveals that despite delivering record group sales in FY 2025, the company's earnings have fallen well short of expectations.
The ASX 300 stock revealed that FY 2025 group sales are expected to be between $614 million and $618 million. This represents a 3.3% to 4% increase over FY 2024's $594.4 million or 6.1% when adjusted to a 52-week sales period.
On the surface, that sounds like a good result. But a deeper look reveals why the market is reacting so negatively.
Management advised that its sales momentum was supported by elevated promotional activity, particularly in the Adairs and Focus on Furniture brands, which has adversely impacted gross margins. Currency pressures from a weaker Australian dollar also weighed on profitability.
Group underlying EBIT is now expected to be between $53.5 million and $57 million for the year. This is down from $57.6 million during FY 2024's 53-week period.
That means earnings are expected to be largely flat at best, and potentially down as much as 7.1% year-on-year — despite its record revenue.
Segment performance
The flagship Adairs brand is expected to deliver sales growth of 9.2% for the year and underlying EBIT growth of 21%, but this will not be enough to offset a steep earnings decline from the Focus on Furniture business.
Focus on Furniture sales are expected to fall 7%, and its EBIT is expected to decline by up to 35.9%. While new and refurbished stores are outperforming, management advised that the broader store network continues to struggle, and promotional discounting has taken a toll on margins.
On a more positive note, the company's online business, Mocka, is on track to deliver a 14.1% increase in sales for the year. Underlying EBIT is expected to come in 18.5% higher year on year.
What's next?
The company has flagged a number of strategic changes under new leadership, including repositioning Focus on Furniture and trialling new retail formats for Mocka. In respect to the latter, it said:
The ongoing trials of Mocka in physical retail stores have continued, with the opening of a large "shop-in-shop" Mocka concept space in the new Adairs store at Tower Junction in Christchurch. The lessons from these trials are guiding the basis of how we will trial the first Mocka store in FY26.
Time will tell if that has an impact on the ASX 300 stock's performance in FY 2026. But it seems that some investors aren't waiting around to see if that will be the case.
