New Broom Clearing The Decks For Adairs

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The company is included in ASX300 and ALL-ORDS

Adairs is the latest retailer to downgrade earnings guidance as challenging conditions post Easter increase price promotions and margin pressure.

-Trading update scorches share price
-Heavy promotions drive margin pressure
-Adairs, Mocka trade well, offset by troubles with Focus on Furniture 
-A recovery in consumer spending is pushed out into FY26

By Danielle Ecuyer

Challenges for a new CEO

Being a shareholder in a small-cap retailer is not for the faint-hearted.

Adairs ((ADH)) has been caught in the crossfire of travails beyond its control since the online shopping boom during covid boosted its earnings and share price to a high of $4.95 in April 2021.

Four years on, earnings per share are struggling to exceed the level achieved in 2019, even though the company is Australia’s largest multi-brand, omni-channel homewares and furniture retailer, Bell Potter points out.

Like many retailers, covid has had an enduring impact on the business not least of which is the resulting strategic alignment to omni-channel marketing and sales from in-store, but also the macro drivers of higher costs, inflation, and interest rates, which impacted consumer spending.

Although the Australian interest rate cycle has turned to easing from tightening, with two RBA cuts of -25bps in hand thus far in 2025, and more cuts priced in by the market, consumers are nevertheless doing it tough.

The latest trading update for FY25, as year-end fast approaches, revealed a number of challenges for the retailer, sending the shares down -20.5%, giving the stock the ignominious title of the biggest ASX300 loser on the day.

As is often the case when management changes, new CEO Elle Roseby, ex-Country Road and Trenery who took the reins at the end of January, is working through a strategic realignment of the business, post transition from previous CEO Mark Ronan, who had been at the company for just over eight years.

Roseby’s goal is to manage inventory via the clearing of ‘high fashion’ stock in bed linen as management shifts towards a more “core” range, UBS explained, a process likely to continue until October, later this year.

Jarden views the new CEO’s background as offering upside potential for Adair’s product range, alongside store layouts to be refreshed, as well as reviewing the company’s pricing strategy.

Sales Momentum Holds Despite Promotions

While top-line revenue guidance for FY25 came in around analysts expectations, the real disappointment was the pressure on gross margins due to increased levels of promotional activity.

A visit to Adairs’ website confirms the company is on a drive to clear stock. Retailers live and die by the inventory sword, as has been evidenced with the likes of City Chic Collective ((CCX)), which never recovered from overstocking excess inventory. (Don’t look up its present share price).

Luckily for Adairs, sales remain strong, with momentum from 1H25 rolling into 2H25. Total sales are expected to advance 9.2% to between $44.0m-$44.2m, while group earnings before interest and tax are guided to be down by -10% from previous consensus expectations, and up 1.2% on FY24 results.

Divisionally, Adairs’ earnings before interest and tax are anticipated to rise by 21% to $35m-$36.5m, although this is below consensus by -10%, Morgans’ analyst highlights.

Discounting and promotions have picked up noticeably post-Easter across the industry, specifically in homewares and furniture categories.

Focus on Furniture, which was acquired in December 2021 as a value offering for bulky furniture, continues to be affected by the high exposure to the Victorian market (15 out of 25 stores), with sales falling overall for the division by -12% on a year earlier in 2H25. On a full-year basis, Ord Minnett sees the sales decline by -7% compared to its previous forecast of a -4% retreat.

UBS estimates gross margins will be down -3pts with earnings before interest and tax margins down to 6% compared to 14% in 1H25. Morgans points to earnings before interest and tax declining by -35.9%, as a greater shift to promotions weighs on profitability.

Historically, Focus has not used discounting but has moved in this direction due to the “highly promotional competitive landscape,” the Morgans analyst explains.

Strategically, Ord Minnett questions whether management will reconsider the growth plans for the business, including store refurbishments and new stores, until at least sales stabilise.

Mocka, the A&NZ online business which gave Adairs digital scale and eCommerce capabilities, is expected to generate double-digit revenue growth to 14.1% in FY25 of the order of $57m-$58m, which exceeds Ord Minnett’s forecast of 6% growth.

Australia has experienced robust sales momentum and should underwrite growth of 25% versus NZ, where sales have been weak but recently turned positive in 4Q25.

Off a low base, Morgans notes, Mocka should achieve earnings before interest and tax of $7m-$8m. While UBS points to a good recovery in Mocka sales of 16% growth in 2H25 from 8% in 1H25.

As emphasised by the analysts, Adairs is heavily leveraged to the consumer and consumer sentiment.

Positively, the business has generated cost savings from a new National Distribution Centre, which brought the function in-house from DHL and generated savings of $4m in FY24. Adairs also implemented an upgrade in the Warehouse Management System, which went live in July 2024 and should achieve $5m in annual savings.

Due to the cadence and extent of discounting flagged by the analysts, with Morgans pointing to department stores, weakness in margins is likely to persist into 1Q26 before recovering in 2Q26. According to UBS, forex headwinds of a lower Australian dollar against a year ago are likely to be offset by lower supplier costs.

Broker’s updated outlook on Adairs

Post the trading update, UBS cuts EPS estimates by -12% for FY25 and -15% for FY26, which results in a lowering of its target price to $2.25 from $2.55. Despite the new CEO’s improvements to store formats and product mix changes being implemented, the analyst cannot be tempted to upgrade the stock from Neutral, stressing the lack of a “compelling” risk/reward at current share price levels.

Ord Minnett also lowers its target to $2.35 from $2.70 as earnings estimates are reduced on the trading update. This analyst maintains a Hold rating.

In contrast, Morgans upgrades the company to Buy from Accumulate with a $2.60 target, despite a downgrade in earnings before interest and tax forecasts of -15% and -14% for FY25/FY26, respectively. This analyst finds the valuation around 9x FY26 price-to-earnings as “undemanding” and supported by a prospective dividend yield of circa 7%.

Morgans thesis is that current levels offer a good entry for exposure to a recovery in consumer spending.

Bell Potter lowers net profit after tax forecasts by -21% for FY25 and -29% for FY26, as the guidance updates are translated into estimates. This analyst expects Adairs to grow revenue 5% in 1H26 while the recovery in Focus on Furniture is anticipated to be pushed out with a return to positive growth in 2H26. Target price slips to $2.10 from $2.65. The rating shifts to Hold from Buy.

Not daily monitored broker Jarden envisages Adairs can return to a 10%-plus earning before interest and tax margin and CEO Roseby’s strategic re-alignment of the business could lift the valuation by 20%.

In addition, this analyst believes if margins could reach 15% by FY27, with another 5% from new store roll outs of three per year from FY26 versus the net four as currently assumed between FY26-FY28, the current valuation has 40% upside potential.

Jarden retains an Overweight rating. Its target price declines to $2.07 from $2.59. 

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