Omnichannel Investments And Technology Overhaul Will Unlock Future Potential

Key Takeaways

• Strategic technology upgrades, new store formats, and brand partnerships are set to drive growth, improve margins, and boost engagement with new demographic segments.
  
• Operational streamlining, omnichannel expansion, and disciplined cost management are expected to enhance profitability, efficiency, and create new revenue streams in adjacent markets.
  
• Margin pressure from discounting, tech investment risks, physical retail exposure, consumer spending dependence, and supply chain complexity threaten profitability and stable growth.

Catalysts

Operates as a specialty retailer of home furnishings, furniture, and decoration products in Australia and New Zealand.

• Acceleration of omni-channel investments, data/AI-driven personalisation, and the upcoming ERP/technology overhaul position Adairs to capture a greater share of the fast-growing online homewares retail market, expanding revenue opportunities and boosting operational efficiency, supporting both top-line growth and improved net margins in the medium term.
  
• Expansion into high-demand life stage categories (e.g. kids, gifting, youth furniture) and targeted engagement with Millennial/Gen Z consumers-supported by brand partnerships like Qantas Frequent Flyer and a revitalised loyalty offering-align Adairs with demographic trends driving household formation and homeware spend, bolstering revenue growth and increasing average transaction value (ATV).
  
• The company's ongoing transition to larger format stores and store network optimisation, alongside refurbishment programs that demonstrate strong payback and traffic uplift, enable Adairs to benefit from urbanisation and the shift toward apartment living, increasing sales productivity per square metre and supporting EBIT margin expansion through higher operating leverage.
  
• Mocka's omnichannel evolution, including its first stand-alone retail store and further store-in-store trials, leverages vertical integration and proprietary product development-creating new revenue streams in adjacent geographies and categories and delivering incremental gross margin improvements as these formats scale.
  
• Successful margin rebuild initiatives (reducing depth of discounting, SKU rationalisation, supply chain partnership cost reductions) combined with strong cost discipline and warehouse automation are expected to deliver sustained improvements in gross margins and operating costs, materially enhancing overall group profitability and free cash flow over the coming years.

Adairs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Adairs's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 6.5% in 3 years time.
• Analysts expect earnings to reach A$48.7 million (and earnings per share of A$0.27) by about August 2028, up from A$25.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 17.9x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.19%, as per the Simply Wall St company report.

Adairs Future Earnings Per Share Growth

Risks

• Persistent gross margin pressure from increased promotional activity and clearance sales, particularly in response to excess inventory and heavy discounting, signals challenges in maintaining pricing power as the market increasingly commoditizes-potentially leading to continued margin compression and weaker net earnings.
  
• Ongoing investment in technology and systems modernization (ERP, AI initiatives, new marketing platforms), while intended to drive efficiencies, entails elevated near-term costs (including significant expensed cloud computing projects), potentially constraining free cash flow and increasing execution risk, with a delayed or uncertain uplift in future revenue or operating leverage.
  
• Store network expansion and refurbishments, especially for Focus on Furniture and the new Mocka brick-and-mortar rollout, risk overexposing the group to structural declines in foot traffic and rising fixed costs, making profitability more vulnerable if physical retail underperforms in the long term.
  
• The group's reliance on continued discretionary consumer spending for homewares and furniture leaves it exposed to macro headwinds such as persistent cost-of-living pressures and economic stagnation in Australia and New Zealand, challenging sustained top-line growth and bringing downside risk to revenue forecasts.
  
• Supply chain complexity from multi-brand integration, expanded product ranges, and heavy dependence on international sourcing, particularly from China, increases exposure to shipping disruptions, regulatory changes, and input cost fluctuations-threatening inventory turnover and putting downward pressure on group-level profit margins.

Valuation

• The analysts have a consensus price target of A$2.446 for Adairs based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.95, and the most bearish reporting a price target of just A$2.07.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$747.3 million, earnings will come to A$48.7 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of A$2.6, the analyst price target of A$2.45 is 6.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.