Adairs (ASX: ADH): After copping a massive beating in 2022-23, shares are on their way back up

After shedding 75% between mid-2021 and mid-2023, Adairs (ASX: ADH) shares have been on a slow and steady recovery, more than doubling since bottoming out.

Adairs is still some way off its pandemic highs, but to grow in the way it has is no mean feat given other e-commerce companies have fallen and never recovered. But let’s take a look at what the future might hold.  

Overview of Adairs

Adairs is a homewares retailer that sells instore and online, targeting middle market consumers. In other words, it sits below high-end fashion (Sheridan for example) but above cheap fashion (anything from Target or Big W).  

Adairs operates three vertically integrated brands – Adairs, Mocka and Focus on Furniture. It listed in 2015 at $2.40 per share and at the time, it only owned the Adairs brand. The latter two were acquired post-listing; New-Zealand based Mocka in 2019 and Focus on Furniture in 2021. Both were acquired because Adairs wanted to expand its online presence.  

Adairs’ share price rises then falls in conjunction with margins

Adairs was a beneficiary of COVID-19 with people using the pandemic, and consequently having to spend more time at home, to improve their homes by acquiring new furniture, decorations or appliances. Its share price followed suit, rising from 68c to $4.90 in just over 13 months – a gain of over 600%.   

But shares came crashing back to earth as the pandemic ended. It reached a record $499.8m revenue and a $66.4m profit. FY22 didn’t start well with months of lockdowns on Australia’s east coast. Ultimately the company’s group sales were 13% higher at $564.5m but its like for like sales were down 2%. Its online sales were 35% – a high figure for ASX retailers. Its profit was $44.9m.

FY23 saw higher revenue still, at $621.3m, but its profit fell further to $37.8m and even its EBIT line was down (by over 16%). And it released a trading update showing 9% declined sales in the first few weeks of the year. This continued in the immediate following months, but things improved enough in the latter half of the year that sales only came in 4% lower at $594.4m. Its EBIT was 10% down and its profit was down 18% at $31.1m.

The company said the results reflected,’ A continuing distinction between customers struggling with the macroeconomic environment and those with the appetite and financial capacity for shopping in our categories’. 

Only days after its FY24 results, it was announced that Mark Ronan would depart in the coming months following a 17-year stint. Within 2 weeks after that, the company hired Elle Roseby, who previously was Managing Director of Country Road and Trenery.

Things turning around

FY25 begun well with 6.6% growth in the first half of the year. The company credited this to ranges in key categories resonating with customers and new efficiancies driven from its warehouse operations (particularly its new management system).

Growth from Mocka was over 12%, again from new product ranges, as well as efforts to raise brand awareness and expand distribution. The first standalone store will be opened in FY26. While Focus on the Furniture growth was more nuanced, the company recorded strong performances at recently refurbished or new stores and was confident things would improve as the pipeline growed.

A mixed outlook

As we mentioned, the company is confident that there are catalysts for growth including efficiencies from its National Distribution Centre, Focus and Mocka stores as well as its loyalty program (Evolve the Linen Lover). No specific guidance was given except it upgraded its capex from $13-15m to $16-18m. Adairs and Mocka were expected to have positive momentum, but things would be challenging for Focus on Furniture. 

Analysts covering Adairs have a mean target price of $2.76, just 4% above the current price. Their estimates call for $618.5m revenue (up 4%) and $0.22 EPS, or a $38.9m profit – the latter would effectively be ‘back to FY23’. They are more optimistic for FY26, calling for $664m revenue (up 7%) and a $46m profit (up 18%).

The company’s multiples are just 10x P/E and 0.7 PEG. These numbers might scream ‘buy’ at first glance, but caution should be held. The macroeconomic environment remains uncertain, and consumers won’t be getting tax cuts in FY26 like they did in FY25. Adairs is more likely to be hit than a higher-end retailer considering it targets the middle class.

The company’s dividend yield (>5%) is something to like, but of course, if the company’s performance does not go according to plan, dividends will inevitably be cut.  

Ultimately, we think it is impressive that Adairs has turned around, but it is not certain this momentum will continue. So we think investors already in should hold, but those not in will need a fair amount of patience (i.e. 2-3 years). 

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