Thesis

My thesis for Adairs is a pretty simple one, invest in what you know and love. Adairs is a speciality retailer of homewares and furnishings and as someone interested in interior design and how my house looks, I find myself going out of my way to see what Adairs has on display whenever I’m at the shopping centre. I’m always impressed with the layouts and displays of both the physical stores, online stores and social media accounts. I was also impressed by Adairs returning their JobKeeper subsidy.

I have bought from both Adairs and Mocka and found both to have great products and excellent customer service. After browsing multiple homewares stores I spent an embarrassing amount of money on pillows and a throw at Adairs to match the colours in my family room. I believe this is what drives the impressive returns on capital the company has been able to achieve; once you find something you like you’re willing to spend more on it as another store will rarely have the exact same product with regards to colour/design/texture. Strong website traffic trends for both Adairs and Mocka suggest the company has a desirable offering.

Adairs navigated the Covid pandemic exceptionally with double digit revenue growth and a strong increase in online sales. While my DCF spits out a ridiculous valuation, a sanity check shows that compared to other retailers ADH is still undervalued. The company has a strong balance sheet with zero debt, a 4 year average FCF/revenue of 13%, and a 2021 FCF yield of 15.9%. ROE was 39% last year and both ROIC and ROE have been high over the past 5 years. Adairs also pay a fully franked dividend.

Risks with this investment are my lack of experience with retail, a possible lack of understanding of the 2-3 most important factors driving continued success, as well as a lack of confidence in my DCF valuation. I believe these are mitigated by a company possessing a strong balance sheet, a long track record of success and a product I know and love. This is very much a Peter Lynch inspired investment.