Release Date: February 24, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Adairs Ltd (ASX:ADH) reported a strong first half of FY25 with total sales up 6.6% compared to the same period last year.
• The company achieved a record sales half, driven by a positive customer response to key categories such as bed linen and improved inventory availability.
• Gross profit improved by 20 basis points, and underlying EBIT increased by 10% to $33 million.
• The National Distribution Center (NDC) improvements led to a 20% increase in items delivered to stores, enhancing in-store product availability.
• Adairs Ltd (ASX:ADH) declared an interim dividend of 6.05 cents per share, reflecting confidence in future performance.

Negative Points

• Focus on Furniture faced a challenging trading period with sales down 4.1% and gross profit margins declining by 250 basis points.
• The New Zealand market for Moa experienced a 10.2% decline in sales, highlighting regional challenges.
• Currency headwinds are expected to impact gross margins in FY26, with the company planning to address these challenges.
• Focus on Furniture's performance is hindered by an overexposure to the Victorian market, which is currently underperforming.
• The company anticipates temporary store closures for refurbishments, which may impact short-term sales.

Q & A Highlights

• Warning! GuruFocus has detected 9 Warning Signs with ASX:ADH.

Q: Given the strong trading update for the Adairs brand, up 15%, are there any reasons to expect this growth to slow down in the second half? A: (Unidentified_3) I wouldn't plan on holding 15%. Your observation around comps getting a bit harder as we move forward is correct. However, the improvements made in H1, particularly around having more stock in stores, are supporting sales in core areas. (Unidentified_2) We are confident with the product numbers we've put down.

Q: Regarding Adairs' product gross margins at 62.4%, was the discounting during Black Friday and Boxing Day more elevated than usual? Is 62.4% where you'd expect to finish for the second half? A: (Unidentified_3) The Boxing Day and Black Friday period was in line with our plans. The margin uplift was due to turning off marketing during a warehouse transition. Margins have come in as expected for the Adairs brand, and we didn't increase promotional activity. We expect margins in H2 to be similar to H2 last year.

Q: For the group, the first half gross margin was 59.9%. How should we think about this going into the second half and FY26, considering FX headwinds? A: (Unidentified_3) Holding gross margins is our objective as we enter FY26. We have currency headwinds, but we're making plans to address them. For H2, there's not much currency risk as we've hedged most of it at 67.

Q: Are there any more cost data or NDC efficiencies left to annualize in the second half of FY25 and FY26? A: (Unidentified_3) Yes, Q1 of the next financial year will still present opportunities as we implemented a new warehouse management system. The material gains are behind us, and now it's about incremental improvements in productivity.

Q: Regarding the trading update, with group sales up 9% year-on-year, do the comps get tougher or easier for the rest of the second half of FY25? A: (Unidentified_3) By brand, Adairs still has the opportunity for solid growth in H2, but 15% growth is optimistic. Focus on Furniture will likely track in line with the first 7 weeks, and Moca Australia is trading well, though New Zealand remains challenging.

Q: Can you disaggregate Focus on Furniture sales growth by Victoria and the broader book ex-Victoria? A: (Unidentified_3) Most of the result is due to Victoria, where we have over half of our stores. Victoria is tougher, but we don't feel we're losing share there. Queensland and South Australia are performing reasonably well.

Q: With the federal election potentially increasing advertising costs, how are you feeling about promotions in the second half? A: (Unidentified_2) We have our marketing plan in place for all brands and are confident with those plans. (Unidentified_3) We have a large direct channel to communicate with customers, which helps avoid cost escalations.

Q: Are there any plans for a strategic review or larger strategic changes in the medium term? A: (Unidentified_2) We will conduct a strategic review as an executive leadership team. The current strategies are the foundation for going forward, and we'll focus on maximizing our store network and being customer-centric.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.