The Adairs Ltd (ASX: ADH) share price is down 14% after providing a trading update for the first half of FY22.
Adairs is a retailer of furniture, furnishings and homewares. Not only does it operate the Adairs brand, it also owns Mocka and Focus on Furniture.
Adairs’ FY22 trading update
The provided update was for the 26 weeks ending 26 December 2021.
It achieved $242 million of sales in that perio, including $12.5 million of sales from Focus on Furniture for 26 days of ownership. That compares to $243 million in HY21 and $180.3 million in HY20.
Like for like sales, after adjusting for closed stores and excluding Focus, were up 2.7%.
Excluding Focus, total online sales rose 8.2% to $97.6 million, representing 42.5% of group sales. Within that, Adairs online sales went up 1.6% and Mocka sales increased 22.8%.
However, underlying EBIT (EBIT explained) is expected to be between $32 million to $33 million, including a contribution of $2.8 million from Focus. That would be a big drop from $60.2 million in HY21. But it would be a noticeable increase from $22.6 million in HY20.
What happened to profitability?
Lower profitability may be a key reason for the Adairs share price being pushed down.
The business lost around 31% of its store trading days, with a 50% reduction in NSW and 48% in Victoria. Management estimate this cost the business between $30 million to $36 million in sales and EBIT of between $14 million to $18 million.
Adairs also explained that the gross profit margin was impacted by the global supply chain cost increases, higher delivery costs to online customers and additional promotional activity. Whilst the gross profit margin will be lower than HY21, it will still be well ahead of HY20.
Difficulties included: lower levels of rent rebates, higher wage costs during store closures (with no jobkeeper unlike the first half of FY21), higher warehousing costs and continued investment for future growth.
Adairs decided to retain one of its distribution centres and slow the transition to a single national distribution centre whilst COVID uncertainty was impacting warehouse operations.
Stock flow remains inconsistent an the domestic supply chain has seen significant disruption.
Focus has traded well, despite the store closures and this continued in the period after the acquisition.
Summary thoughts about the Adairs share price
After an update like this, I can understand why the market was pretty negative, combined with overall share market volatility.
However, I think most of what was revealed are going to be short-term issues. It appears there will be no more store closures. The supply chain issues should improve, hopefully sooner rather than later.
I think weakness in the Adairs share price can prove to be a long-term opportunity. Online sales continue to grow and I think Focus will prove to be a solid performer. However, there could be more volatility this year.
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