EM – HY22: This is why Adairs (ASX:ADH) share price is falling.

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Adairs Ltd (ASX:ADH)’s share price is down 14% after issuing a trading update for the first half of fiscal year 22.

Adairs is a furniture, home furnishings and housewares retailer. In addition to operating the Adairs brand, it also owns Mocka and Focus on Furniture.

It had sales of $242 million during that period, including $12.5 million in sales from Focus on Furniture for 26 days possession. This compares to $243 million for the 21st half and $180.3 million for the 20th half.

Excluding Focus, total online sales increased 8.2% to $97.6 million, which corresponds to 42.5% of the group turnover. Adairs online sales increased 1.6% and Mocka sales increased 22.8%.

However, underlying EBIT (explained EBIT) is expected to be between $32 million and $33 million, inclusive a $2.8 million contribution from Focus. That would be a big drop from $60.2 million in the 21st half. But it would be a notable increase from $22.6 million in the 20th half.

The company lost around 31% of its in-store trading days, with a 50% decline in NSW and 48% in Victoria. Management estimates that this has cost the company between $30 and $36 million in revenue and between $14 and $18 million in EBIT.

Adairs also stated that the gross profit margin was impacted by global cost increases in the supply chain, higher delivery costs for online customers and additional promotional activities. Gross profit margin, while lower than H21, will still be well above H20.

Difficulties included: lower rent discounts, higher labor costs during store closures (excluding Jobkeeper as opposed to first half of FY21), higher warehousing costs and continued investments for future growth.

Adairs decided to maintain one of its distribution centers and to slow the transition to a single national distribution center while COVID uncertainty impacted warehouse operations.

Focus has traded well despite the store closures and continued to do so in the post acquisition period.

After an update like this I can understand why the market was quite negative combined with the general stock market volatility.

I think however, that most of what has been revealed will be short-term issues. Apparently there will be no more store closures. Hopefully the supply chain issues should improve sooner rather than later.

I think the weakness in the Adairs share price may prove to be a long-term opportunity. Online sales continue to grow and I think Focus will prove to be a solid performer. This year, however, could see more volatility.

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