Release Date: February 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adairs Ltd (ASX:ADH, Financial) successfully delivered on short-term objectives to reduce the impact of sales decline on group EBIT.
- Online sales outperformed in-store sales, particularly during key events like Black Friday.
- Gross margin improved across all brands due to reduced shipping container rates and disciplined pricing strategies.
- The National Distribution Centre transition to Adairs management resulted in improved service levels and lower costs.
- Mocka brand delivered a strong performance with an EBIT of $3.5 million, significantly improving from the previous year.
Negative Points
- Sales were down across Adairs and Focus brands due to reduced customer traffic and port delays causing stock shortages.
- Group EBIT of $28.6 million was down 19% compared to the prior year.
- Significant inflationary pressures impacted the cost of doing business, despite cost reduction efforts.
- Focus on Furniture sales were down 15.8% on the prior year, with industrial action at Melbourne Ports delaying deliveries.
- Adairs experienced stock shortages in core lines, impacting sales during the second quarter.
Q & A Highlights
Q: Can you quantify the cost savings delivered in the first half of 2024 and the split between the NDC and other initiatives?
A: The warehousing-related costs are reflected in the DC cost line, showing a $3.5 million saving, with $700,000 of depreciation added back. The CODB line, which decreased by 5.3%, includes wage and rent increases of 3.5% to 5.5%, offset by other cost savings.
Q: Are the warehousing cost savings from the NDC annualized to the $4 million benefit expected?
A: Yes, the $4 million net of depreciation is expected in calendar year '24. The $3.5 million savings achieved since taking control will continue, but the rate of savings will be less in H2. We are on track to deliver the $4 million for this calendar year.
Q: Will there be additional cost savings in the second half for Adairs?
A: Yes, we will continue to implement cost efficiencies, with more benefits in H2 due to the benefit of time. We have also implemented another round of cost efficiencies in the last 6 weeks.
Q: How do you expect cost growth into fiscal '25 and the operating leverage benefit from a potential sales recovery?
A: If sales growth returns to long-term average rates of 3% to 5%, we should see operating leverage. Cost initiatives will continue into FY '25, with the DC being the most significant. Our focus remains on managing costs and driving sales growth.
Q: Can you discuss the January trading update relative to the first half?
A: Foot traffic remains down, with conversion up in-store at Focus and Adairs. January saw a return to traditional foot traffic levels after a relatively good November and December. The biggest impact on sales is the decline in foot traffic.
Q: What is the reason for the increase in non-DC CapEx guidance from $12 million to $12 million-$14 million?
A: The increase is due to potential new stores. The final amount will likely be closer to $12 million unless all new store opportunities are realized.
Q: What will it take to reignite foot traffic?
A: It's a combination of macro factors, product range, and in-store stock availability. We are focusing on inspiring customers through product and improving stock levels. Personalization initiatives in the Linen Lover program and better stock management will also help.
Q: Does it still make sense to have three different brands in the portfolio?
A: Yes, the brands serve different customers. Now that supply chains are more under control, we can explore cross-pollination opportunities. Each brand has its strengths, and we will leverage them to enhance product offerings and work together more effectively.
Q: Is the outlook suggesting profit growth in the second half?
A: We aim for profit growth half-on-half, subject to top-line performance. The focus is on maximizing top-line growth while managing costs tightly to deliver on the bottom line.
Q: What is the sustainable EBIT margin target for Adairs, Mocka, and Focus?
A: For Adairs, the target is a minimum of 10% through the cycle. Mocka aims for a 10% EBIT margin, with potential to reach 12%-15%. Focus aims for a floor of 15%, with potential for mid-teens margins as new stores open and operating leverage improves.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
