Adairs Furnishes Strong Start To FY16

This story features ADAIRS LIMITED. For more info SHARE ANALYSIS: ADH

-GM down on increased discounting
-But sales growth substantial
-Supported by robust housing
 

By Eva Brocklehurst

Adairs ((ADH)), a retailer of home furnishings, has reported its maiden first year result as a listed company with a flourish. Sales growth was well above prospectus, mainly from growth in the fashion/decorator category.

The gross margin was below expectations. This was explained by a decision to increase discounting in the final quarter to improve the inventory position heading into FY16. The company is undertaking due diligence in the South African and New Zealand markets with no decision yet on whether to commence operations.

Adairs remains intent on improving its product offering, adding to its range and increasing the average spend per sale. Around 8-12 new stores are to open in Australia each year for the next five years.

Discussions on a trial of three department store concessions are advanced, which will provide its Urban Home Republic brand with a CBD presence in those locations without such a store. Historically, Adairs’ store footprint has been concentrated in Victoria.

Morgans has an Add rating and $3.14 target. The broker has no problem with the discounting carried out into year end, given strong sales growth. The company is seen as benefitting from significant investment over recent years. The main risks, in Morgans’ view, are a softening of consumer spending or a material deterioration in the Australian dollar from current rates.

There was no upgrade to FY16 guidance, although the company stated the year has started well. Morgans expects an upgrade will come, with upside to the like-for-like sales assumptions leading to further operating leverage on costs. Despite disappointing gross margins the broker assumes 61.5% is achievable in FY16. Like-for-like sales growth is expected to moderate over the second half of FY16, given the strong comparables which will be cycled.

Sales growth would need to fall below 8.1% and gross margin below 60.0%, UBS calculates, before the company’s prospectus forecasts would be at risk. The broker’s forecasts for FY16 profit are 6.0% higher than prospectus, and a Buy rating and $3.30 target are in place.

UBS had some concern regarding the gross margin in FY15 but believes the slight reduction to expectations in this regard is more than offset by higher forecast sales. Moreover, sales momentum does not appear to be slowing.

Goldman Sachs believes the initiatives underway should deliver growth rates which exceed the market and this, in turn, is being supported by robust housing activity. The broker anticipates 15.0% earnings growth over the next couple of years.

Goldman Sachs, not one of the eight brokers monitored daily on FNArena’s database, retains a Neutral rating on valuation grounds with the stock trading close to its $2.85 target.

See also, Brokers Highlight Potential In Adairs on August 3 2015.
 

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