Adairs Ltd (ASX: ADH) has continued to grow strongly through the rest of the first half of FY21.
Adairs is one of the largest retailers of homewares and home decoration products in Australia. It also owns the online-only Mocka brand which sells home furniture and decoration, kids and baby categories.
Adairs trading update
Despite 43 stores in Melbourne being closed for 12 weeks, it delivered good growth numbers with total Adairs sales growth of 5.2%, whilst open Adairs stores delivered like for like sales growth of 17.3%.
Adairs online sales grew by 99.7%, continuing its fast growth rate that it achieved in the second half of FY20. Overall, total Adairs sales went up by 23.4%. Mocka sales flew higher by 45.1%. Online sales actually represented 39% of total sales, comprising Adairs online sales of 27% and Mocka represented 12% – this was an increase compared to 20% for the same period last year.
Margins and inventory
Adairs has been focusing on its gross margins in both Adairs and Mocka. The gross profit margin has been “well above” last year due to the continuation of pricing, promotion and sourcing initiatives outlined in the FY20 results. This has continued since the AGM update.
Inventory levels are in line with management’s plan going into Christmas. Mocka inventory levels have improved but remain lower because of stronger than expected sales and its longer product lead times to the market.
Management comments
Adairs CEO and Managing Director Mark Ronan said: “Whilst we have clearly been a COVID-19 beneficiary, the result has been delivered through the team’s strong execution against our articulated business strategies and the fundamental strength of our vertical business model.
“Our model allows our customers to shop with us when, where and how they want whilst simultaneously delivering attractive financial results. For the group to achieve an expected EBIT outcome in six months that exceeds the EBIT of the full prior year, which was itself a record for the company, is testament to the strategic health and operational excellence of our business.”
HY21 profit guidance
Adairs is now guiding that first half sales is expected to be between $235 million to $245 million, which would represent growth of 31.2% to 36.9%. Underlying EBIT (EBIT explained) is expected to be in a range of $62 million to $66 million, this would represent growth of 167% to 184%.
This is extremely strong guidance. Adairs has been a great business to own during this period. The question is – how long will this elevated level of demand last? Is it permanent? Will it slow down in the next few months as government stimulus slows down? I’m just not sure.
Adairs is trading at a pretty low double digit price/earnings ratio for its growth rate. When combined with the dividend, it may still be able to generate total returns outperformance. But there are other ASX growth shares I’d go for first in the software space such as Pushpay Holdings Ltd (ASX: PPH).
