Adairs Limited (ADH) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Adairs Limited Update on Coronavirus Impact Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and CEO. Please go ahead.

Good morning, everyone. I'll read a brief statement in support of our ASX release this morning and then open the line up for questions. Adairs yesterday announced that given the ongoing uncertainty of the duration and impact of the COVID-19 pandemic, the company considers it appropriate to withdraw its FY '20 earnings guidance and has decided not to proceed with the interim dividend. The management team has initiated measures across the entire business to firstly attempt to protect the health of our team and customers by reducing potential exposure to and managing potential cases of COVID-19. And secondly, to implement various measures and operational changes designed to position the company to endure the expected adverse impact of COVID-19. Until as late as last week, Adairs and Mocka were delivering good results with the first 11 weeks sales up 7.1% like-for-like in Adairs and 18.1% for Mocka, with an acceleration of like-for-like sales achieved over the past 4 weeks, in line with our seasonal plan. Our omnichannel strategy and focus on improving gross margins and driving stock turns are working well. And importantly, our new season stock is resonating very well with our customers. All Adairs stores and both the Adairs and Mocka online platforms remain open to support our customers. The company's offshore suppliers are now largely operational, and we are receiving orders weekly in both Australia and New Zealand. Despite all this and the hard work and strong execution of the Adairs and Mocka teams and the performance to date, the outlook for sales over the balance of the financial year has changed materially with significant uncertainty as to the medium-term trading conditions. In response to these conditions and the inherent uncertainty, the company is actively managing our cash position. Management has commenced taking decisive actions around maximizing near term sales, reducing operating costs, managing working capital and deferring nonessential capital projects. Importantly, we are working collaboratively with landlords to agree to sustainable occupancy arrangements throughout this period. Further, we are continuing our planning around the national distribution center project and the related supply chain initiatives. As part of managing our cash position and the ongoing uncertainty, we have taken the decision to not proceed with the previously announced dividend. With cash on hand of $16 million, net debt of $48 million, undrawn term debt of $26 million and our working capital facilities of $6.5 million, we believe Adairs is in a solid financial position. The Board remain confident in this financial position, and we'll continue to actively manage the liquidity of the business throughout these uncertain times. Obviously, the COVID-19 pandemic and its impact on our community and business is evolving rapidly. As a team, we are reviewing the situation daily and taking advice from the relevant government authorities to ensure we are caring for the health and safety of our team and customers. Further, we are reviewing the impact of COVID-19 is having and is expected to have on the trading performance of our business and taking immediate actions to best position the business to navigate these ever emerging circumstances. And with that, I'm happy to take questions as they come.

[Operator Instructions] The first question comes from Aryan Norozi from UBS.

Just first one for me. Can you please talk about the flex you guys have around your rental payments? I know it's an ongoing discussion, but under a scenario where you do have to shut stores as in closing in the short term, is there any rental relief you guys can sort of then get?

Look, it's a little bit unprecedented, but if stores are shut, then obviously we'll be in ongoing conversations with the landlords, and those conversations have been happening for the better part of 3 or 4 days or the last week or so with a lot of the major landlords. So it's fair to say we're also trying to deal with an ever-evolving and changing circumstances out there. So we believe, in terms of managing cash, that is a relatively straightforward piece that we can work with the landlords on their longer-term view of how we sustainably get to an arrangement that works for both of us over the next 3 to 6 months is taking -- it's going to take a little more time and a little more discussion. So flex in terms of managing is definitely there. But agreement with that flex is ongoing.

Okay. And then can you guys -- if you can just give us how many stores you guys have in hold over at the moment?

It's roughly 20% to 25% of the portfolio, which is quite normal.

Okay. And just a second one for me. I know you guys haven't disclosed this, but just any sort of idea around banking covenants for your debt facilities? It doesn't have to be an exact number. Just any sort of qualitative commentary, if you could, the numbers, that would be great.

We obviously have covenants for the similar covenants to what you'd expect most companies to have around gearing fixed charge and so on. And we don't anticipate any issues in relation to -- we don't have any issues in relation to that at the moment. And we're working on what we need to do to maximize cash flow and continue to operate within those covenants.

Yes, perfect. And then just in terms of cost initiatives, I mean, could you just give us an idea around what initiatives you guys could do, whether it'd be reducing staff working hours or any other things that we should sort of be aware of if things accelerate?

Well, obviously, there's lots of scenarios being reviewed and thought about by the business. We start with a relatively large casual pool of employees out there that we are working with. We're talking to our teams more broadly about how we try and share this situation across the board, be that our full-time and part-time teams across both stores and our support office. And anyone thinking about winding that back and sharing some of those hours such that we keep the important part of our business, we are seeing to the very best of our ability. But obviously, when you think about a retail business, there's 2 major costs and that's rent and salaries. And we're actively working on both of those to make sure that we manage them in line with the sales decline that we're seeing over the last 3 or 4 days or last week and working towards that, and we'll continue to manage that as it comes to life. So they're the big ones. There's easy elements within that, and then there's more difficult elements within that. There's other costs that we can take out of the business that we will work through, in particular, around marketing, discretionary marketing costs and anything that may be more aimed at physical versus digital. So we are actively looking at all cost lines within the business and working them through to work out what we think is pertinent and really important to delivering the sales results that we perhaps forecast over the next 3 months and what we think we can do without to preserve cash and make sure that we are managing the business as tightly as we can, given the current uncertainty.

Perfect. Just if I can take one last one. And you just mentioned around sales decline over the last week. Is that across both the online and the in-store channel? Or are you seeing, obviously, as people are shifting to online that business -- that part of the business still growing and in-store taking a hit?

In-store is definitely taking a much bigger hit than online. I think where we are up to on a promotional calendar is impacting a little bit of our online, but we're not seeing anywhere near the same -- we're not seeing a big shift to online, to answer that question. At this stage, we expect that might start to come through over the next few weeks and as more people shift to online, and marketing calendar that we are running perhaps enables that to more readily come through the numbers. But we are currently dealing with a very short data set. So getting really good read as to how that plays out is challenging.

Sorry, online is down as well the last week year-on-year. Is that correct?

Not the last week, but the last few days. There were specific things that we ran last year that we didn't run this year. So as I've spoken about regularly, and this is obviously exacerbating it. You never look at things in such short time windows, but that's the data that we're dealing with today. So I expect that we would see online continue to grow. And we've certainly seen that in Mocka, where there's less of the marketing noise over the last few days in the Mocka business. We are seeing that continue to grow despite these challenging times in terms of return.

Your next question is from Aaron Yeoh from Goldman Sachs.

Mark, just a couple of questions from me. First one, you made a comment about looking to maximize sales during this process. How do we think about, I guess, maximizing sales relative to, I guess, focus on the gross margin as you have in the recent few months?

Well, I think, Aaron, there'll be less of a focus on gross margin given we are likely -- depending on how big the sales decline is. And I sort of want to reiterate the fact that we are -- this has been a very short-term change in our trading pattern. And we're talking about 5 or 6 days, but we think we can clearly see the market is headed that way, and therefore, it's prudent for us to put out a statement today. But if that continues, we would turn inventory into cash, and that will see us focus less on gross margin than we have over the past period. I mean, it's -- that's the nature of where the market might be and where we are. So cash will become more important and gross margin will take a back seat in some instances towards that gross margin piece as we make sure we manage the inventory position of the business, which clearly wasn't set up to see this coming over this half and in such a short period of time.

Yes, sure. I mean, that was my assumption as well. I guess, in terms of that like-for-like number that you've given us for this period, what was the gross profit like-for-like growth during this -- during the period? Because obviously, that was what you gave as the shared result. I was just wondering, have you already started to, I guess, maximize sales and lesser focus on gross margin in anticipation of this or is it more based on the recent data in the last week, for instance?

Yes. No. Aaron, we haven't done the complete count of like-for-like gross margin dollars, including currency and all the other impacts. But what I can tell you is the gap between like-for-like sales and like-for-like GP dollars is very similar to the one that we put out as part of the first 7 weeks. So we -- that's why we haven't closed that number today, but it's not dissimilar to that. So this has -- these like-for-like sales are not reflecting a change in the way that we were thinking about gross margin. And the business continued to trade up until -- and continues to trade today, actually, realistically, largely in line with our promotional plan that we had in place for the season, and we are now adjusting and making those changes thinking forward. As to how we might respond to this with -- as we've always spoken in the past, plan A, plan B and plan C, to make sure that we manage the business and the inventory levels across what it looks like a very challenging Q4.

Yes. And I mean, I understand that there's a fair amount of sort of lead time, which goes into putting in the orders and receiving supply. You've mentioned that supply started coming back online. I'm just wondering, heading into this very uncertain fourth quarter, is there any flex you have with regards to reducing the amount of, I guess, new inventory that's coming into your business?

I think there's a combination of things we can do in that space, Aaron. And I think one thing I know about this business is working with our suppliers and some of the goodwill that we saw when we got on the phone today and as part of, obviously, the initial COVID-19 pandemic in China and talking to them and how we might be able to help them out. I expect that those good relationships are going to play well for us over the next period of time, whether that's deferring orders, whether that's canceling orders, whether that's holding, yes, there's lots and lots of different ways that we can manage that. And we are obviously actively thinking about that. But I'd just come back to 4 or 5 days. We're working through all of those things. We know the things we can do, the levers that we will pull. One thing this business is good at is we've got a lot of great experience and we know how to manage our way through those sorts of things. So we will be actively managing that over the next period of time. And we obviously won't land as much inventory into the business over that period of time.

Yes, understood. And then just a question with regards to, I guess, the number of stores you have. Did you open any new stores during, I guess, this last 2.5 months? And obviously, you previously had a store sort of growth target for this year. I'm assuming we can decisively assume that you probably won't open any new stores. Would there be any, I guess, permanent closures during this process as well?

Look, Aaron, it's very early days, but we won't be opening any new stores during this time. That is -- yes, we've deferred anything in relation to that. I think that comfortably falls into our concept of deferring all nonessential capital projects and stores fall into that bucket. We are -- there are stores that we were already e-master closure over this period as part of our ongoing fee. So they will continue to walk down that path. We'll continue to review the profitability and trading of all the stores. Those in holdover are obviously easier to manage through that process. And there may be others that we give due consideration to over this time as well. As we've spoken about in the past, our focus over the last couple of years realistically, when we thought about our store portfolio, is how we create as best we can, a more flexible store portfolio with less long lease terms and the like. And that is now going to be advantageous for us with the current holdovers, plus some of those deals that we did on more like 12 months and 2-year deals over the last couple of years, not having 3, 4, 5 years to run on them. So we will manage that on a store-by-store, case-by-case basis over this period of time. But as part of withdrawing the guidance, clearly, the number of store numbers has also been withdrawn as part of that process.

Yes. Sure. And sorry, I might just sneak in one last question. How do we think about the relative sort of contribution in the fourth quarter generally relative to the third quarter?

The fourth quarter is bigger than the third quarter. As I mean, we've spoken before, June is an important month for the business, and we're writing the relevant plans around how we consider June and what that might look like this year compared to prior years. So yes, so I mean, if you think about our quarters, Q2 is the biggest followed by Q4, Q3, Q1 in terms of profitability.

Right. So in terms of, I guess, contribution to this half, I mean, could you lastly assume that the split is kind of 40-60 third quarter relative to like fourth quarter in terms of contribution is the half from a...

I don't think it will be quite that big. It wouldn't be quite that big, and I wouldn't want to give a number here. I haven't got those sitting in front of me. It's not something that I particularly spare that all the time, but Q4 is bigger. It's not what that -- that's 50% bigger than Q3. If you think 40-60, it's not that big a gap.

Okay perfect.

It's much smaller than that.

Your next question comes from Jo Little from Morgans.

I know it's an incredibly difficult question, but just in the last week or the last 4 days, can we get any feel -- you might not want to disclose this, but just how much sales have rolled off?

Look, I don't particularly want to disclose that on the basis that it's such a short period of time. And that's -- it's not that I don't want to disclose it for hiding and it's a massively high number or small. We just need -- and it's particularly choppy. We had areas earlier this week that made budget. And so we're really getting mixed messages come through at all. I think this 2-week period over from, obviously, the weekend and going forward for the next 2 weeks, will give us much better visibility into that, and that will allow us to start to create some plans around what those numbers are. But suffice it to state that's big enough for us to be out here today, taking our guidance out and setting Q4 up as being particularly challenging to achieving the overarching results of the business. So yes, that's the way it really goes.

Yes, got it. And just how quickly can rental relief kick in? I mean, I imagine your landlords up to last 4 days have been -- had access to yourselves potentially, and clearly, you've been doing well. Now the discussions start. Can they -- do they kick in quite quickly or take time?

We pay rent monthly, Jo, so they can kick in pretty quickly.

Yes, okay. And is there anything in your rental contracts, I know there are some overseas, that if government requires stores to be shut down -- I know we're not at that point yet, that rent is not payable? Or are there any clauses in there or not?

No, not in the general lease that we use. But some, yes. Every landlord has a slightly different lease. But I wouldn't be relying on the clause in there that instantly moves us to 0. But I think even landlords would understand that it's a wide-spread closure where we're going to have to be thinking about how we manage both businesses through that time.

Okay. And just lastly, if you have this data available just in that last week, sorry to focus on it, but large-format versus shopping centers. I imagine, large-format today has been holding up better for obvious reasons. How did that play out more recently?

Yes, it is better. It is better. Homemakers are performing better than our shopping center stores in most instances. Shopping center stores are definitely the ones that are hurting more so. And we expect that to continue realistically. And that's also on a bit state-by-state basis, depending on the nature of that homemaker center and store type. New South Wales, as I've called out before, are more indoor-style homemaker centers and they probably felt a more -- a larger impact than some of our stand-alone big boxes in other areas of Australia. So really it's format by format-specific and store by store-specific even. But yes, it's a fair assumption to think that homemakers are performing better than our shopping center stores.

[Operator Instructions] You now have a follow-up question from Aryan Norozi from UBS.

Just a clarification question, please. I think, Mark, you said earlier that the difference between like-for-like gross profit and like-for-like sales is similar to what you saw at the trading update at the result. So you did 8.5% GP growth and 2% like-for-like. If you're reporting 7% now for the last few weeks or last 11 weeks, does that imply your GP dollar growth is 13%? Or am I looking at that the wrong way?

You're in the right ballpark. That's the way that statement was to be read -- understood, yes.

Your next question comes from Mark Wade from CLSA.

Difficult situation, for sure. Just wondering what are the kind of the different scenarios you've explored from the funding perspective as well as just day-to-day trade?

So I'm sure like everyone, Mark, we're running all sorts of different scenarios based on different potential issues we face and putting it back against our banking covenants and everything else. So liquidity is the #1 focus, and we've taken, as Mark said, a number of steps around that, including the dividend. Yes, we're -- depending on how it closed out, I think we've covered off most of the scenarios, but as we all know, it's changing pretty quickly. So we're trying to stay ahead of it and doing everything we can to stay ahead of it as this comes forward towards us.

Is there a risk -- with good product in there, as you've discussed in the past, and that sales have been okay thus far -- I guess, until the last week anyway. Is there a risk that you can't take too much and pull the button on discounting and on products you might have been able to sell okay? Or is it just not worth taking that risk and you just got to clear it regardless?

I think, Mark, we'll still be quite measured in the way we go about that. I mean, we're not going to run away from who we are and what we do in the short term. And that said, it's changing regularly and frequently. And more and more data gives you more and more ideas as to categories impacted, all the rest of it. So we will run our normal way of trade and the way we think about it in light of the changing circumstances around it. So will you see a 70% off everything at Adairs store next week? No way, no. Right? That's not the way to best manage our business and best manage our brand through this process. So we believe we will come out the other side, and therefore, we have to make sure that we take the right steps at this time to manage that, and also make sure that we don't do lasting brand damage along the way. So we'll continue to trade-off both of those points as we think about it. But I think going back to that, it's a bit like managing inventory during this time, managing margin, managing sales. That's actually -- our business has geared us to do this. This is what we do, and we have a regular operating mentality that what happens: we test, we learn, we try, we'll work things out as we go. Some things will be more functional than others, that has to be more effective than other methods. And that will be the way that we trade our way through this. So you won't see us hit panic. That's not the way to trade our way through it. What you will see is a really measured approach, which is the typical Adairs approach to trading through these sorts of -- these are unprecedented. But we've had bad seasons before, and we understand what levers work and what levers don't, and we'll start by applying some of those, and we'll no doubt learn some stuff over the quarter.

That's really comforting. I mean, wish you all the best. It's tough times. Yes, that's really good to hear.

Thanks, Mark.

Your next question comes from Benn Skender from Canaccord.

Mark, you talked about plans to structure the hedging program out to have more control over your cost base from an inventory perspective. Can you just talk about how much of this you've been able to implement thus far?

So we've got about 1/3 of FY '20. So we're fully covered for FY '20, the balance of this half, and we've got about 1/3 of FY '21 covered, which is mostly front-loaded, and that's $0.70.

Your next question comes from [ Leo Benitez from Shaw and Partners ].

And apologies if this question has been asked and I just got on to the call in the last 5 minutes. But just with regards to rental relief and how that could work, is it possible to divulge on how that could possibly work going forward?

I think we're not realistically able to divulge on the call today how we think that will work, but other than to say that we are working collaboratively with our landlords and working with them on how it works for both of us to make sure that we come up with a methodology that enables both businesses to work their way through such uncertain times. So it's a little bit courses to courses because some things will work with some landlords and won't work for others. So there's -- while there is a blanket approach, so we must speak to each landlord and have a conversation with them and work our way through what it looks like, there's not a blanket approach to what that solution perhaps looks like on a case-by-case basis with our landlord partners. But we are actively in conversations with them all. And hence, not realistically able to divulge how we're working through that, but other than to say that as a management team, we are actively working through that and coming up with some creative solutions, I expect, to work our way through the next period of time.

Sure. So who would be the top 3 landlords in order?

Well, we've got large holdings with Westfield, Vicinity, INP and Aventus.

Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.