Shares of homewares retailer Adairs (ASX:ADH) experienced a substantial decline of more than 15% during Monday trading. This drop was triggered by the company's decision to withhold its final dividend due to lackluster earnings for the year ending June 30. Additionally, an unfavorable trading update for the new financial year and a projection of increased warehousing costs contributed to the share price slump.
Despite reporting a 10.1% rise in group sales to $621.2 million for the 2022-23 financial year, Adairs faced challenges. The company noted a 5.8% increase in gross profit to $285.5 million, but saw a significant decline in underlying EBIT by 16.4% to $64 million. Statutory net profit also dropped by 15.7% to $37.8 million.
Surprisingly, the share price tumbled by 15.2% around 2:30 pm, despite the results aligning with the downgraded guidance provided in early June. The decision to suspend the final dividend, leaving only the 8 cents per share interim dividend for shareholders from the fiscal year, contributed to this significant decline. The share price had already fallen by 30% earlier in the year, underscoring the rationale behind this decision.
One positive aspect was a reduction in net debt by $20 million to $73.6 million, which is anticipated to be helpful in light of additional costs associated with a transition to a major warehouse during the current financial year.
Adairs reported that brand sales increased by 2.9% to $430.8 million for the year. Store sales demonstrated growth of 7% to $314.2 million, while online sales experienced a decline of 6.7% to $316.6 million. Meanwhile, sales for the Focus on Furniture business grew by 5.3% to $141.9 million on a 52-week basis. Store sales in this segment increased by 9% to $132.1 million, but online sales dropped significantly by 27.7% to $9.8 million.
The company attributed the margin decline to warehousing and supply chain costs. Consequently, Adairs decided to internalise the operations of its national distribution center starting from September 6, aiming to enhance customer experience and reduce expenses. Despite a 16.2% rise in warehouse costs, the national distribution center was operating at lower volumes and higher costs than anticipated.
Increased costs were also attributed to higher wages, elevated rent (including the removal of COVID-related rent rebates), and greater utility expenses. These elevated warehousing costs and operational adjustments led to the decision to omit the final dividend, as Adairs prioritised maintaining a strong balance sheet.
The company disclosed plans to invest approximately $20 million in acquiring warehousing operating assets from DHL, implementing a new warehouse management system, and executing the transition. The full transition is expected to span 12 months but is projected to yield cost savings of $4 million annually in 2024, compared to the current operating model, with an expected payback period of four years.
Adding to the challenges, Adairs' start to the 2023-24 financial year has been less than promising. A trading update for the initial seven weeks of the new financial year revealed a decline of 8.9% in group sales, 8.5% in Adairs brand sales, 5.2% in Mocka sales, and 10.9% in Focus sales. Despite the difficult trading environment, the company managed its margins, with group margins reportedly outperforming the previous year.
Given these circumstances, management characterised the near-term outlook as "challenging" and emphasised material cost reduction initiatives to align the business with prevailing and anticipated trading conditions. Adairs also expressed optimism about its pipeline of new stores, with a preference for larger and more profitable locations.
