1H18 trading update – executing well
Adairs (ADH) provided a very positive 1H18 trading update, reporting:
- like-for-like sales +14.8% (implying last 11 weeks were >17%);
- revenue of A$149.1m (+19.8% vs the previous corresponding period); and
- EBIT A$21-21.5m (+75-79.2% vs the previous corresponding period).
The like-for-like sales acceleration in 2Q18 is partly reflective of the weak comp cycled in the previous corresponding period (pcp) but also a stronger product offering and stock execution. Additionally, management noted that broadening of the product range in larger-format stores has been effective. The sales growth outcome of 19.8% implies c5% store footprint growth vs the pcp.
Upgrade cycle continues
Following the strong 1H18 performance, ADH has again upgraded its FY18 guidance. ADH now expects FY18 sales of A$300-310m (vs previous guidance of A$290-305m; a 2.5% upgrade at the mid-point) and EBIT of A$40-44m (vs previous guidance of A$34.5-39m; a 14.3% upgrade at the mid-point). At the mid-point of guidance this implies 2H18 revenue growth of 10.9% and EBIT growth of 10.4% (c7bp margin compression vs the pcp). Based on FY18 store guidance of 166-168 (c7% growth vs the pcp), this implies FYF18 like-for-like sales growth of 5.2%. We believe this is achievable given ADH is still cycling negative (-2.4%) comps in 3Q18. We forecast FY18 EBIT of A$43.4m, which is at the upper-end of ADH's guidance range and assumes c56bp of operating leverage in 2H18.
Following the update, our earnings per share forecasts increase by 8.5% in FY18, 7.6% in FY19 and 7.1% in FY20.
Earnings risk still to the upside and the PE can go higher
The update highlights the gross margin and operating cost leverage of this vertical model when product execution is on point. We note that given ADH is cycling negative like-for-like sales growth in 3Q18, strong like-for-like sales growth may persist for longer and there is the potential for guidance to be upgraded again in FY18.
Trading on 10.9x FY18F and with upside risk to our forecasts, we maintain our Add recommendation.
Key risks include AUD depreciation, weak like-for-like sales growth, increased competition, product execution and industry discounting.
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