Adairs Limited today released its results for the 27 weeks to 31 December 2023 (1H FY24).

Whilst sales were impacted by a challenging macro-environment, compounded by isolated stock

availability and ranging issues within the Adairs business, the Group successfully delivered on its

key objectives of:

• growing gross margins across all three brands;

• reducing CODB in the Adairs business despite significant inflationary pressures through a

comprehensive cost-out program;

• taking operational control of the Adairs NDC with no business disruption whilst improving

service levels at a lower cost;

• turning around the Mocka business with an EBIT of $3.5m for the half (LY $0.3m);

• opening two new Focus on Furniture stores;

• materially reducing net debt; and

• resuming the payment of dividends.

1H FY24 financial summary (first 26 weeks1)

• Group sales of $291.4 million, down 10.1% on a comparable 26-week basis

• Improved gross margin rate (+220bps) which reduced the impact of a decline in sales with

gross profit down 6.8%

• CODB down 3.9% with cost management initiatives fully offsetting inflationary pressures

from higher wage rates, payroll taxes, rents and utilities

• Underlying2 Group EBIT of $28.6 million (27 weeks: $30.9 million), down 19.3% on a

comparable 26-week basis

• Statutory NPAT of $17.7 million and EPS of 10.2 cents

• Group net debt of $58.6 million, $15.4 million lower than June 2023

• Interim dividend of 5.0 cents per share (fully franked) declared and DRP remains active

Takeaway

The business continues to be challenged in a difficult macro environment, but most key numbers are moving in the right direction. The reinstatement of the dividend is welcome and provides a good signal for both adequate capitalisation and improved operating conditions for the full-year.

Of course, the recent rally in the shares, including a 15% jump today, means the market was already moving in anticipation.

A few months after my brief bear case straw based on the price action, it has played out as expected. The recent trading update has in fact taken it to new 52w lows.

Buyers at these levels may need to be patient as the macroeconomic headwinds, overlayed with the company-specific issues, are likely to delay any recovery in the operating performance of the business.

The straws immediately preceding this one have already covered off the fundamentals very well (thank you everyone!).

I just wanted to follow up on my TA note earlier (which looked promising, but was quickly unwound - indicating a swift change of opinion from the market).

The immediate reaction to the 1HFY23 results looked encouraging, with the stock holding the 30w MA, after a steep drop in the preceding couple of weeks from close to $3. However, it is trading below that level as of now - this level has to be reclaimed quickly, or the odds of further drops towards the 52w lows increase.

After a torrid back-half of last year, Adairs seems to have found some traction going into the new year, technically speaking. Breaking above the pre-Covid highs and holding there will be a good launchpad for further gains - perhaps the worst is already priced into the stock.

I am not big on retailers, but Adairs seems to stand out compared to its peers if nothing but on valuation grounds alone, as elucidated by @Vandelay in his straw. They have made a good acquisition with Mocka, and have navigated the choppy waters of the pandemic well so far.

Like storied businesses with good loyalty programs, their Linen Lovers member base is growing steadily and puts a floor on average customer spend and basket size. The strong housing market can only be a tailwind for the forseeable future.

The company is in a sound financial position, and pays a good dividend that seems to be sustainable given the payout ratio is circa ~ 60%.