Adairs: Will current earnings prove sustainable?
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 08 December 2020, 4:00 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
- Adairs' (ASX:ADH) strong sales trends have continued, with Adairs total sales +23% and Mocka
- The re-opening of Melbourne has seen in-store sales bounce back quickly (LFLs
+5.2% and +17% excluding the Melbourne closure period), while online sales
growth continues to show strong momentum (+100% yoy).
- Material upside to ADH’s current valuation/rating will ultimately lie in its ability to
demonstrate that current elevated earnings levels are sustainable – which is 6-12
months away from prove-up, in our view.
- In the meantime, we expect ADH’s balance sheet to be in a strong net cash position.
This provides ample flexibility for ADH to potentially pursue additional opportunities
(akin to Mocka). Add maintained and updated price target (login to view price target).
Online and in-store supporting strong growth
ADH provided a trading update (first 23 weeks of 1H21), comprising: Adairs LFL sales
growth +5.2% (+17.3% excluding Melbourne closures during this period); Adairs online
+100%; and Mocka +45% yoy.
This highlights a healthy combination of in-store and online
growth in the wake of restriction/social distancing easing. We understand the online
growth is coming from both new and repeat customers, with an emphasis on new.
estimate that 1H21 online sales (cA$60m) represents a similar run-rate to that achieved
in 2H20 (when stores nationally were closed for c5 weeks). Therefore, the incremental
performance is coming from in-store, highlighting the importance of the group’s omnichannel
model – particularly in this category.
1H21 guidance well above expectations
Gross margins continue to be well above the pcp (tight inventory position + materially less
promotional activity), while significant operating cost leverage also resulted on the
elevated top-line outcome.
ADH provided 1H21 guidance for: revenue A$235-245m
(+35% yoy at the mid-point); and EBIT A$62-66m (+180% at the mid-point). This EBIT
forecast compares to our prior 1H21 expectation of cA$58m.
Upgrade FY21 by 15%, thereafter by c4%
We have upgraded our FY21 EPS forecast by c15%, while our FY22/23 forecasts lift more
modestly (+4%). We now forecast FY21 EBIT of A$97m (+60% yoy), split A$64m/A$33m,
implying 1H/2H21 growth rates of 136%/14% respectively.
We note the 2H21 will not see
any benefit from JobKeeper. We see upside risk to our 2H22 forecasts – largely relating
to GM and opex leverage. We estimate Mocka is currently run-rating +A$60m of revenue
and A$14m of EBIT, despite suffering from a sub-optimal inventory position.
We still see
big upside potential in this business as brand awareness continues to build and
investment is made (stock, resources, etc).
Add rating maintained and updated price target
ADH has been a major beneficiary of the domestic consumption tailwinds brought about
by COVID. The group has executed well on product, attracted new customers and taken
market share. Retaining these new customers will be key for when demand ultimately
The enduring benefit of these tailwinds can be seen in ADH’s strong balance
sheet, providing flexibility for additional growth avenues in time. Add rating maintained;
updated price target (login to view price target). Based on our current FY22 forecasts, ADH is trading
on <10x and 7% yield.
Find out more
Morgans clients can access further analysis by browsing the latest research on our client website. If you would like access or more information, please contact your adviser or nearest Morgans office.
Need access to our research?
You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team.
Create trial account
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.