Adairs lifts guidance after $76m e-commerce acquisition

Adairs lifts guidance after $76m e-commerce acquisition

Shares in furniture retailer Adairs (ASX: ADH) surged 13 per cent to $2 each in early trading this morning after the company lifted profit guidance and announced plans to acquire online home and living products seller Mocka.

Adairs has entered a binding agreement to buy Mocka for a notional initial enterprise value of around $NZ80 million (AUD$75.5 million).

The transaction is due for completion in mid-December and will be funded by a combination of Adairs' debt facilities and the issue of approximately 3.2 million ADH shares to Mocka's owners.

Adairs was attracted to Mocka for its attractive margins in Australia and New Zealand, with a carefully curated range in the home furniture & décor, kids and baby categories.

All of Mocka's design, development, sourcing and marketing is undertaken in-house, and products are sent far and wide from two distribution centres in Brisbane and Christchurch.

Adairs managing director and CEO Mark Ronan describes Mocka as a highly complementary and attractive acquisition.

"We have shared DNA in that we are both design-centric with in-house product design and development which allows us to offer our customers high quality "design led, value for money" differentiated product," says Ronan.

"Importantly, this also means we have significant control of the vertical supply chain and in market pricing. Finally, we are each highly customer centric organisations, with a passion for great service.

"For our shareholders this acquisition creates a larger more diversified business with increased exposure to the fast-growing online channel."

Ronan expects online sales to increase from 17 per cent of the total in FY19 to almost 30 per cent in FY20 after normalising for a full year's contribution from Mocka.

"Mocka is highly profitable and cash generative with low recurring capex and lease commitments," he says.

"We see many opportunities for Adairs to add value to an already successful business. Our knowledge and experience of the home market will allow us to help management further develop the Mocka brand, especially in Australia, and support the Mocka team to continue to deliver growth."

Updated guidance

Even if no synergies were to come about as a result of the deal, Ronan still expects the acquisition to deliver earnings accretion of 10 per cent in FY20. As a result, EBIT guidance has been raised from $43-46 million to $48-52 million.

This revised guidance is based on a 30-week contribution from Mocka, with Adairs group sales set to be in the range of $385-400 million.

"We had a successful Linen Lovers Event in November and are well placed in terms of planning and inventory ahead of the important Christmas trading period," says Ronan.

The company recorded a 2.4 per cent drop in EBIT for FY19 at $43.4 million, while NPAT was down 1.3 per cent at $29.6 million.

On a more positive note though, sales were up 9.7 per cent at $344.4 million and like-for-like growth stood at 7.2 per cent.

Online sales also jumped 41.7 per cent to $58.8 million in FY19.

"The FY19 results show that we continue to deliver above market sales growth thanks to our unrelenting focus on delivering excellence in retail execution and our understanding of what our customers want both instore and online," Ronan said in the results announcement in August.

"We are addressing our short-term supply chain issues and have a clear process to finalise the long term solution.

"We see this as an opportunity to contribute to building and sustaining our competitive advantage. In the last 12 months we have made strategic hires in key areas of our business."

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