Adairs (ADH) | What does the new normal look like?
Trading update and re-opening of stores: ADH previously announced (27 March 2020) the temporary closure of its Australian stores for a period of 4-6 weeks, with its NZ operations also closed. In yesterday’s trading update, Adairs’ revealed sales for the five weeks ended 3 May 2020 in Australia declined c.37%, with overall sales down c.40%. Adairs now expects stores to commence re-opening from 7 May, with all stores expected to re-open by end of June. Its NZ operations will also re-open, including Mocka New Zealand.
Online sales accelerate: The online channel of Adairs and Mocka have continued to operate in Australia, with sales accelerating significantly in recent weeks. Over the aforementioned five-week period, Adairs’ online sales are up 221% and Mocka Australia sales up 151%.
Focus on costs: ADH remains focussed on managing its cost of doing business and working capital position to preserve cash. Importantly, ADH revealed the value of inventory is currently 5% lower than at the same time last year. Costs have also been a key focus: Adairs has registered for the JobKeeper program in Australia, and in New Zealand it has received the Wage Subsidy Scheme for employees. ADH continues discussions with landlords with the intention to share the sales impact through both the closure and recovery phases.
Financial position suggests liquidity remains tight: Adairs currently has cash on hand of $41m, $84m of gross repayable debt and net debt of $43m. It also has access to undrawn debt facilities of c.$12m. Aside from its current debt position, Adairs also has deferred acquisition payments owed to the vendors of Mocka (based on a multiple of EBIT) over FY21-FY23. The minimum consideration to be paid is $18.9m, although based on the initial consideration, the payment may be closer to $26.4m.
Investment view: Adairs’ operations have been significantly disrupted. Uncertainty surrounding its rental obligations and deferred acquisition payments have combined to create considerable uncertainty over the Group’s financial position and capital structure. Following the recent rally in share price, we downgrade our call to HOLD (from Buy), with a price target of $1.40.