Put it this way @mbry9625, Adairs is still making a decent profit and is likely to continue making a profit over the next few years.

According to the stats, “There are 50 companies in the ASX 300 that make no money, up from 48 following the latest index rebalance, MST Marquee research shows.” (AFR, Sep 2022)

And, “a $100 model portfolio that backed strictly loss-making companies since 2000 is worth just 24¢ today after compound average losses of 23 per cent a year dating back to inception. Over those 22 years, the ASX 300 has earned 8 per cent a year, on average.”

My wife and I spent most of out career farming. If we sold our business the first time there was a drought when the profits were down, at the same time no one else wanted to be there, then we wouldn’t have been there to see the profits the business could make when the fortunes turned around. We eventually sold our farm in one of the best years in a decade, and it wasn’t at a loss.

Disc: held IRL (0.5%), was a bit higher than that once!

I totally agree with this @Rick.

Further to your point about profitability, with FY23 EPS consensus at $0.25 and forecast DPS $0.16, there is still a good margin of safety before $ADH has to significantly cut its dividend (even if EPS is downgraded from here). Note that FY23 EBIT has been downgraded 16% at its midpoint.

The update cites "gross margin for 2H FY23 remains in line with plan and is expected to be ahead of 2H FY22. Group inventory has been well managed and will finish below December 2022 levels". This indicates to me that free cashflow will be OK, even as the company continues to maintain capex which is central to the thesis of the $1bn sales growth strategy. Good inventory management is key, as this is the thing that can kill retailers in a downturn.

In looking at the downgrade announcement headlines, Mocka continues to be a basket case and Focus was disappointing (although furniture is one of the harder hit discretionary categories, generally) - together these provided some "sticker shock". However, the core engine of the Group is Adairs, where revenue held up well at only -3.4% for the HYTD, and remember that this contributed 72% of Group Gross Margin at the HY. Some analyst commentary has pointed to the relatively good performance in the Adairs brand likely being due to the value of the loyalty club.

Both the depressed P/E, share price and broker vals in my view reflect a forward looking downturn in discretionary retail, with momentum of funds out of the sector likely exacerbating the reduction in SP below valuations.

If $ADH can continue to invest in its growth strategy and pay a reasonable (even well below 8%) dividend through this downturn, I believe it will emerge stronger out the other side. The financials of the business look strong enough to weather 12-18 months of hard times in the disretionary sector without creating existential risk.

My thesis for investing in $ADH in the first place was that it is a) well-managed, b) profitable with a good ROE, c) has a credible growth strategy in its niche and d) was significantly under-valued at my entry point.

Since initiating my position, we've had one bad result due largely to operational delivery underperformance, which rattled the "a) well-managed" part of the thesis, but did not destroy it. The other points of the thesis are intact. The fact that I am now down 30-40% largely reflects that Australia has now begun its march through the lower half of the discretionary retail cycle. The worst time to sell a cyclical stock that is on track to survive and even thrive, is when you are in the trough of the cycle. (Note to self: next time, be more patient before buying into a cyclical stock idea!)

The key risk I see from there is in FY24, where consensus EPS is $0.26. It Australia has a half decent recession, that level of earnings could be significantly at risk. However, there continues to be a large gap between the SP $1.61 and the analysts consensus SP forecasts of $2.33, which supports the FY24 EPS of $0.26. Of course, we should expect to see downgrades to that figure over the coming days, noting that we've overnight already seen the consensus TP fall from $2.67 to $2.33 (i.e., -13%).

Thinking further about FY24, FCF is forecast to be over $80m and DPS $0.16 representing a yield of 9.5%. It is possible that both revenue and GM come under further pressure due to a full year of difficult conditions through FY24. In that case, 50% of the dividend gives cashflow support of $14m and 100% of the dividend gives support of $28m, against a FY CODB of c. $200m - much of which is fixed costs, exposed to inflation. My point being, that $ADH has a good degree of flexibility within its capital allocation decisions to manage through a bad 12-18 months without increasing debt.

I am of the view that $ADH is now very heavily under-valued because 1) we are now close to the low point in the cycle (6m?, 12m?), 2) we are heavily into the broker downgrade cycle and 3) retail downgrades are now going to start coming thick and fast. (Because of this, among other things, I don't rule out that SP can fall further!)

I am 70-80% confident that in 2-3 years, $ADH will be worth a lot more than it is today, and that this will represent a very strong return from today's SP. So, I'd be bonkers to sell. This was my instinct yesterday, before doing the analysis summarised above.

However, I am not buying more because 1) I am not a retail market expert 2) I have less conviction about management than I did a year ago and 3) there is a reasonable probability that in a deeper ot longer recession scenario, $ADH proves to be less robust that I have assessed. My small position size makes these risks tolerable.

Disc: Held in RL (1.3%) and SM (4%)

My brother in law got a job at Bunnings 5 years ago.

He already had a long stint as a painter maintaining the Sydney Harbour Bridge and the Story Bridge in Brisbane. Before that he was working at Qantas as a painter for the planes before being made redundant. So he has lots of trade experience already.

But still, he had to go through FIVE (yes FIVE) Group Interviews before he got the job when they were looking for people to run their new store. It almost wore him down so he was so relieved he got the job.

He is still working there though and is a very happy and busy employee there. Get paid less than his old job but he did it because he was getting exhausted climbing up the bridges to do his work.

Something to include in your probability for those here waiting a substantial correction in WES which I've noticed received lots of upvotes. So maybe on balance of probabilities you guys are correct but personally I would not bet against a market leader that has the pick of talent as I mentioned in the above post.

BTW: I don't hold WES. Do hold Qantas though.