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Why Adairs (ASX:ADH) shares could still be a top pick

Adairs Ltd (ASX: ADH) shares will be on watch today after releasing a strong FY21 trading update.

FY21 sales update

Home furnishings business Adairs has given an update for the first 17 weeks of FY21, ending 25 October 2020.

Sales have remained elevated despite 43 stores in the metro Melbourne area being affected by COVID-19 restrictions.

Overall, Adairs stores showed a 0.6% decline in sales. But like for like sales, after adjusting for the Melbourne closures and only including ones open, showed growth of 17%.

Adairs online sales rocketed higher by 134%. Total Adairs sales grew by 22%. Mocka sales went up by 48%.

Online sales represented 41% of total sales, compared to 17% for the same period last year. Gross margins are “well above” last year. The underlying gross margin in the first 17 weeks was around 600 basis points (6%) higher than last year, with the Mocka gross margin up 150 basis points (1.5%). Management expects the gross margins will moderate over the rest of FY21.

Management said inventory levels will be in a good position for the key Christmas period. Costs continue to be kept under control.

Adairs CEO and managing director Mark Ronan said: “I am pleased that the momentum seen in the second half of FY20 has continued into FY21. These results highlight the strength and continued success of our brands, supported by our omni channel strategy and operational agility.”

Summary

This was a solid update by Adairs and it continues to deliver strong revenue numbers under the conditions. If it keeps going then it could be a good pick today.

I’m not sure how long these growth numbers will persist, particularly as government stimulus starts to wind down. There are other retail ASX growth shares I’d rather buy such as City Chic Collective Ltd (ASX: CCX) and BWX Ltd (ASX: BWX).

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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