Adairs shares plummet as closures cut earnings by $18m

Adairs shares plummet as closures cut earnings by $18m

No amount of soft pillows and quilts could buffer Adairs' (ASX: ADH) fall onto a particularly hard mattress today as COVID closures, higher warehouse costs, spiralling wages and inconsistent supply chains led to an uncomfortable result for the December half. 

The homewares and furnishings retailer is yet to release audited results but in a trading update today the Melbourne-headquartered company revealed stagnant group sales results of $242 million for the first half of FY22, down $1 million year-on-year.

Adairs reports the most significant factor impacting total sales was the government-mandated store closures which reduced the overall number of store trading days by around 31 per cent, bogged down by NSW and Victoria where the percentages were at 50 per cent and 48 per cent respectively.

Management estimates COVID-related store closures reduced Adairs sales by approximately $30-36 million and EBIT by circa $14-$18 million.

Underlying EBIT is expected to be in the range of $32-33 million, representing close to half the $60.2 million recorded in 1H22 but well above the $22.6 million recorded in the December half pre-COVID.

Many investors opted to close the curtain on their Adairs holdings following the update with shares dropping by close to 20 per cent in early trading. At the time of writing ADH shares are down 18.9 per cent at $3.09 each.

Gross margin has remained well ahead of pre-pandemic levels, but it was lower than in the previous year due to global supply chain cost increases, higher delivery costs to online customers and additional promotional activity.

The group noted its cost of doing business (CODB) had been hit by higher warehouse costs, not helped by delaying the transition of one distribution centre (DCs) to its new national DC while COVID uncertainty was disrupting warehouse operations.

CODB was also impacted by higher salary and wage costs to support teams during store closures, lower rent rebate levels, however, these are still being negotiated with landlords, and lack of JobKeeper versus the previous corresponding period.

Adairs highlight stock flow into Australia and New Zealand, from Asia, remains inconsistent due to factory and shipping capacity disruptions across the region, and whilst it claims inventory was well managed in anticipation of these challenges there were still significant disruptions to the domestic supply chain.

The group did however clarify that despite this challenge and ongoing workforce shortages, delivery capacity continues to improve and there is a high availability of products, across all brands, in Adairs' distribution centres and stores.

"During the half, despite significant operational disruptions, we have made strides in progressing our strategic priorities by commissioning our new national distribution centre, upsizing selected stores, continuing to expand our range and adding to our omni channel capabilities," says Adairs CEO and managing director Mark Ronan.

Online now represents 42.5 per cent of group sales for Adairs, with its New Zealand-based online retailer Mocka, acquired more than two years ago, accounting for the highest growth at 22.8 per cent, versus 1.6 per cent for Adairs online.

The unaudited first half result includes 26 days of ownership of Focus on Furniture which Adairs acquired for $80 million in late 2021.

The group reports Focus has traded well across the half despite significant store closures in Q1, and this has continued in the short period post acquisition by Adairs, which was effective from 1 December 2021. Its’ 26-day post-acquisition contribution delivered sales of $12.5 million, including $1.6 million (or 12.7 per cent) from its online channel.

"We also built our portfolio of vertical omni-channel retail brands by bringing forward the finalisation of the Mocka acquisition, and completing the acquisition of Focus on Furniture," says Ronan.

"The progress we've made against these priorities gives us confidence in the growth prospects of the Group."

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