Sustainability Initiatives Will Strengthen Future Brand Reputation

Key Takeaways

• Enhanced control over supply chain operations and a new warehouse management system are expected to improve net margins and earnings in the next fiscal year.
  
• Store network optimization, digital upgrades, and sustainability efforts are set to boost revenue, improve net margins, and attract environmentally-conscious consumers.
  
• Economic challenges like inflation, currency impact, and supply issues are pressuring Adairs' sales, margins, and profitability amidst declining consumer spending.

Catalysts

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

• With the improved control and efficiency in the National Distribution Center (NDC) after taking operations back from DHL, Adairs achieved supply chain cost savings of $4 million in FY '24. The implementation of a new warehouse management system positions the company to deliver further cost savings and operational efficiencies, potentially boosting net margins and earnings in FY '25.
  
• The planned expansion of Adairs' store network with larger formats, alongside upsizing and closures of less profitable smaller stores, is designed to drive better store economics and increase gross lettable area. This focus on optimizing the retail footprint is expected to enhance revenue growth and improve net margins.
  
• Mocka's successful technology replatforming of the Australian website is set to enable improved website performance and customer experience. This paves the way for initiatives aimed at increasing conversion rates and transaction values, which should contribute to higher revenue and earnings growth.
  
• The investment in personalization programs and a unified view of customer data through the Linen Lover program is expected to drive incremental sales growth by enhancing customer experience and engagement. These digital enhancements aim to boost revenue effectively while maintaining healthy net margins.
  
• Continued efforts to reduce carbon emissions and improve sustainability practices across the business could lead to potential cost savings and margin improvements, as well as enhance the company's reputation and attract environmentally-conscious consumers, which may positively impact future earnings.

Adairs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Adairs's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 7.6% in 3 years time.
• Analysts expect earnings to reach A$54.0 million (and earnings per share of A$0.31) by about February 2028, up from A$31.1 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 10.8x on those 2028 earnings, down from 15.6x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Adairs Future Earnings Per Share Growth

Risks

• The macroeconomic environment is impacting many households, leading to a reprioritization of household expenditure and a decline in customer traffic, which could negatively affect Adairs' future revenue and sales growth.
  
• Inflationary pressures from higher wage rates, rents, utilities, and freight are persistent and could put pressure on Adairs' net margins, despite efforts in cost management.
  
• Group sales are down 4.3%, and individual brand sales have also decreased, suggesting potential risks to revenue and earnings if sales fail to recover or continue to decline in the future.
  
• The decline in the Australian dollar and normalizing import costs are headwinds that could impact gross margins and overall profitability.
  
• The tight supply of raw materials, like feathers, due to factors such as bird flu, may lead to increased costs and potential pricing pressure on core products offered by Adairs, affecting revenue and profit margins.

Valuation

• The analysts have a consensus price target of A$2.579 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$2.85, and the most bearish reporting a price target of just A$2.25.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$711.2 million, earnings will come to A$54.0 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of A$2.76, the analyst price target of A$2.58 is 7.0% 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.