Store Expansion And Technology Investments Will Improve Efficiency And Customer Experience

Key Takeaways

• Enhancements in logistics and digital capabilities are expected to reduce costs and improve profitability, positively impacting net margins.
  
• Expansion and store upgrades aim to drive sales and revenue growth through improved customer experience and increased product visibility.
  
• Significant risks to revenue and profitability from weak performance in specific markets, competition, FX headwinds, and potential challenges in investment returns.

Catalysts

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

• The implementation of a new warehouse management system and improvements at the National Distribution Center have reduced costs and improved service levels, which should enhance future profitability and increase net margins.
  
• Expansion plans for Focus on Furniture with new store openings and refurbishments are anticipated to drive higher sales, contributing positively to revenue growth.
  
• Mocka's re-platformed websites and omni-channel strategy are designed to improve customer experience and conversion rates, potentially boosting sales and revenue growth in the future.
  
• The strategic emphasis on expanding Adairs’ store network and upsizing existing stores is expected to showcase more products and drive higher sales, positively impacting revenue.
  
• Investments in technology, processes, and digital capabilities aim to enhance efficiency and support scalable growth, likely leading to improved profitability and net margins.

Adairs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Adairs's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 7.4% in 3 years time.
• Analysts expect earnings to reach A$53.9 million (and earnings per share of A$0.31) by about April 2028, up from A$32.8 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 11.5x on those 2028 earnings, up from 11.4x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.89%, as per the Simply Wall St company report.

Adairs Future Earnings Per Share Growth

Risks

• The adverse performance of Focus on Furniture, with a 4.1% decline in sales and a 250 basis point decrease in gross profit margins, poses risks to overall revenue and profitability, especially given macroeconomic pressures and the heavy dependence on the Victorian market.
  
• Mocka's challenges in New Zealand, with a 3.5% decline in sales due to a more constrained market and reduced traffic, suggest potential future revenue risks and uneven market performance across geographies.
  
• The intense competition within the retail segment and potential disruptions in consumer spending habits, particularly in Victoria, could negatively impact revenue growth and market share for both Focus and Mocka.
  
• Heightened FX headwinds anticipated in FY '26, with hedged commitments around 64-65 cents, could compress gross margins, requiring strategic cost management and impacting profitability.
  
• The need for significant investments in store expansions, refurbishments, and distribution center improvements implies potential risk to net margins if these investments don't translate into expected revenue growth.

Valuation

• The analysts have a consensus price target of A$2.734 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$3.25, and the most bearish reporting a price target of just A$2.55.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$726.4 million, earnings will come to A$53.9 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 8.9%.
• Given the current share price of A$2.13, the analyst price target of A$2.73 is 22.1% higher.
• 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.