Recovery Play – Adairs

In the GC1 November Monthly Report, we discussed that we were rotating our portfolio to benefit from the vaccine-led recovery. We accumulated Adairs (ASX:ADH) since then and it has become one of our top holdings. We think ADH is well positioned to continue its growth journey in the post-COVID period because of its strong online sales growth and flexible store portfolio.


Company overview

ADH is a leading specialty retailer of home furnishings and home decoration products in Australia and New Zealand with a national footprint of stores across several formats and a large and growing online channel.


Strong online sales growth

ADH invested significantly on online sales channels before the COVID-19 outbreak and these investments have paid off. One example is the acquisition of Mocka, a pure-play online retailer offering well designed, highly functional and stylish home and living products at ‘value’ prices. Mocka delivered total sales of $45.9 million in FY20, representing growth of 30%.


At group level, ADH’s online sales grew 61%, offsetting a 7.3% reduction in store sales. Online sales represented 26% of total sales in FY20.



During FY20 Q4, ADH experienced strong increase in online penetration. 15% of online sales were to existing customers who were shopping online with ADH for the first time. Over 30% of online sales were to new customers. We expect this acceleration in online penetration and growth rates brought about by COVID-19 restrictions to have a permanent benefit for ADH as a category-leading omni-channel retailer.


Flexible store portfolio



ADH has a flexible store portfolio which allows it to weather any economic uncertainty. The government is going to pull back fiscal support in March. Economists have a mixed view on economic growth in the future. A flexible store portfolio allows ADH to adjust its rent costs relatively quickly to respond to the level of demand. With 72% of store leases expiring within 3 years, ADH can close stores when bricks & mortar demand is weak, or upsize its store count if the demand is strong. We like business models that are flexible.


Conclusion

ADH is positioned to grow strongly and win market share in both online and bricks & mortar markets. And if the consumer turns our weaker than expected, there is some downside protection from relatively short-term lease liabilities allowing marginal stores to be shut down. We see a great potential upside from ADH.


Till next week, happy investing.


Michael and Kenny

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