Adairs Limited (ADH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Adairs Limited Full Year Results 2026 Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Elle Roseby, Managing Director and Group Chief Executive Officer. Please go ahead, ma'am.

Well, good morning, and thank you for joining us for Adairs Limited's FY '26 Full Year Results. I'm Elle Roseby, Group CEO and Managing Director of Adairs, joined by Matt Edmonds, our Group Chief Financial Officer. This morning, we lodged our FY '26 results with the ASX. We'll speak for around 20 minutes, and then we'll take your questions. Running order, I'll cover the group overview. Matt will take you through the group and brand financials, and then I'll come back to the brand highlights, Vision 2030 strategy update and current trading and outlook. So Slide 3 to 4, the group overview and FY '26 group performance. I'm pleased with the FY '26 results across Adairs and Mocka with both businesses delivering strong sales and EBIT performance. This performance reflects sharper and more relevant ranges, improved margins, stronger customer engagement and greater operating discipline and a more deliberate approach to capital allocation. Focus on Furniture had a particularly challenging year, most notably in Q4, and I'll take you through that in more detail later in the presentation because I think it's really important to understand the context around that performance and the actions we are taking in response. Group sales grew 3.8% to $641.7 million. Underlying EBITDA was $68.7 million, up 1%. Underlying EBIT of $55 million was broadly flat and underlying net profit after tax rose 1.7% to $34.6 million. Net debt reduced by $20 million and dividend grew 9.5% on FY '25. The statutory loss -- sorry, the statutory result is a loss of $39.4 million, driven by significant items that are predominantly noncash. The largest being the impairment of Focus on Furniture goodwill and brand intangibles. And Matt will take you through the bridge later. These results are consistent with the trading update we released on the 8th of July and finished at the top end of it. Group sales of $641.7 million were marginally above the top of the $640 million to $641.5 million guidance range with Adairs and Mocka both above the top of the sales ranges and focus within its range. Group underlying EBIT of $55 million was in the upper half of the range and net debt of $47.6 million came in better than the approximate $49 million indicated and the impairment, the other significant items and statutory loss all landed within the ranges stated in July. Overall, our group results are in line with the July update and slightly ahead on sales, net debt and statutory outcome. Slide 5, group overview and performance. Slide 5 shows the 3 brands and each are at different stages. Adair, our largest brand, delivered record sales of $459.2 million, up 3.9% and pleasingly, through improved cost efficiencies and margin growth, underlying EBIT was up 14.9% to $41.1 million. Mocka continuing its growth trajectory saw sales of $71.2 million, up 22.9% with EBIT up 32.1% to $10.1 million. And Focus on Furniture, the business is in turnaround, sales of $111.3 million, down 5.6% and EBIT of $3.8 million. Adairs and Mocka together now generate over 90% of group earnings and both grew earnings at expanding margins. The turnaround path focused, and I will cover the plan in the brand section. So on Slide 6, focus on furniture, so what happened in half 2 and specifically Q4. So let me address focus directly. A year ago, we said we expected improved outcomes at Focus in FY '26, and we did not deliver them. The year had 2 distinct phases. Through the first 3 quarters, delivered sales were broadly flat, up 0.2% and in the fourth quarter, sales fell 25.5%. And there were 2 issues that drove that decline. The first was a difficult leadership transition. For the incoming management team, the handover was limited with reduced visibility of inventory planning, operating processes and management information. This lack of data had a material impact on decision-making and interrupted inventory ordering, coupled with overtightened store discounting discretion. This disrupted trade through peak fourth quarter trading. And the second issue predates the transition. Stale range and underinvestment in store presentation behind a multiyear pattern of gradual share loss. The strength focus is known for value and quality has been impacted. The range has fallen behind on the core offer, fashionability and variety and price renewal and availability is a primary levers in the turnaround. On the response, sustainable management structure is in place with group executive oversight and a strengthened business unit advisory committee, including non-executive director participation. Ordering cadence was rebuilt through April and May and inbound stock is restoring availability and lead times through Q2 FY '27. Discounting discretion has been returned to store teams under clear governance. The first exclusive design-led collections land in stores from October with regular monthly injections throughout '27. A VM store presentation reset will be completed throughout Q2 across the network, and we've overlaid an additional light refurbishment to the Frankston store, which has outperformed the network and these findings will evolve the store design experience going forward. The market for larger ticket furniture was softer during the year. However, we attribute the shortfall primarily to factors within our control. I'll now hand over to Matt to take you through the financials.

Thanks, Elle, and good morning, everyone. I'll start with the divisional results on Slide 8 with group underlying EBIT of $55 million, broadly flat on last year, down 0.4%. And within that, Adairs and Mocka together added $7.7 million of earnings whilst Focus declined $8 million versus the prior year. In Adairs, sales of $459.2 million was up 3.9%, 4% in the first half and 3.6% in the second, with like-for-like store sales up 1.4% and online up around 9% to $132.3 million, driven by strong Click & Collect growth, which now accounts for 4% of total sales. Gross margin was 60.9%, down 10 basis points on the full year. Within that, margin did decline 300 basis points in the first quarter on deliberate clearance activity to reset the inventory and then pleasingly recovered each quarter thereafter with second half gross margin up 150 basis points on the prior year. This reflected elevated ranges, pricing discipline and reduced promotional depth. Total cost of doing business was also a highlight, reducing by 100 basis points, reflecting continued efficiency in the supply chain with total cost per unit down by 11% and improved store productivity, which was up 5.2%. Underlying EBITDA rose 12.8% and underlying EBIT of $41.1 million was up 14.9% at a 9% margin, up 90 basis points. Importantly, second half EBIT at Adairs grew 48.9% on the prior year, driven by strong margin expansion and disciplined strong cost management. Inventory closed at $66.4 million, broadly flat against 3.9% sales growth. Turning to Mocka. They recorded sales of $71.2 million, up 22.9%, 29.8% in the first half and 16.4% in the second, led by continued strength in Australia at plus 38% and New Zealand flat at plus 0.4% as the offer there is reset. Growth came with margin expansion with gross margin of 60.2%, up 80 basis points on product innovation at higher initial margins and increased share of full price sales. Cost of doing business was flat with warehouse and freight efficiencies funding continued customer acquisition marketing investments. Underlying EBIT rose 32.1% to $10.1 million at a 14.1% margin, up 100 basis points with inventory closing 14.7% lower. In Focus, sales were $111.3 million, down 5.6% with the order book closing the year at $11.2 million. Gross margin was 50.4%, down 40 basis points from the prior year. The sales decline in the fourth quarter came through traffic and conversion, which is why product renewal and availability is the primary lever identified in our turnaround. Cost of doing business rose 590 basis points, reflecting deleverage on soft like-for-like sales plus the annualized cost of the new Victorian distribution center and customer support office. Underlying EBIT ended at $3.8 million, down 67.6% at 3.4% margin. Importantly, on a half year basis, that comprises a first half profit of $5.8 million and a second half loss of around $2 million. That second half performance is reflected in the impairment assessment, which I'll cover on Slide 11. Turning to Slide 9. Group level sales were $641.7 million, up 3.8%, with the store network reducing by a net 6 stores from 194 down to 188, reflecting the disciplined portfolio management, including the Adairs New Zealand exit. Underlying EBITDA was $68.7 million, up 1%. Depreciation rose 7% on distribution and store investments, taking underlying EBIT to the $55 million already quoted. Net interest fell 14.7% on lower average debt with underlying NPAT of $34.6 million, up 1.7% and underlying earnings per share at $0.195. Moving to Slide 10. The balance sheet strengthened during the year. Net debt was $47.6 million, down $20 million versus the prior year, now at 0.7x underlying EBITDA, the lowest level in over 4 years. Inventory closed at $91.2 million, down 5%. And by brand, Adairs and Mocka positions are clean and current following the first quarter clearance reset. And at Focus, the aged stock clearance is nearing completion, ordering has been reestablished and stock is rebuilding with availability recovering into Q2. Underlying operating cash flow was $65 million against $30.4 million last year and a cash realization ratio of approximately 119%. Working capital released $14 million, led by the inventory reduction and payables timing. That funded $17 million of debt repayment and $13.4 million of dividends. At the full year, dividends announced at $0.115, fully franked, up 9.5% on FY '25, representing 59% of underlying NPAT and the dividend reinvestment plan remains available. Moving on to Slide 11, which bridges the underlying results to statutory loss. Underlying NPAT was $34.6 million. The focus on furniture impairment deducted $56.7 million after tax and technology upgrade costs, which were expensed as incurred consistent with prior periods and the $2.8 million of legacy store software write-offs deduct $13 million, AASB 16 lease accounting deducts $2.4 million and the Adairs New Zealand exit costs deducting a further $1.8 million. That reconciles to the statutory loss of $39.4 million or $0.222 per share. On the impairment, following the fourth quarter deterioration, we tested the Focus cash generating unit at the end of the year on a value and use basis. The charge is $63.5 million pretax, which comprises of goodwill of -- sorry, $41 million written down to nil and $22.5 million against the brand intangible. The impairment is noncash and has no effect on the group's banking covenants or capacity to pay dividends. In FY '25, Adairs New Zealand contributed -- sorry, in FY '26, Adairs New Zealand contributed $12.8 million of revenue and an underlying EBIT loss of $0.8 million, which we recognized additional exit costs of $2.5 million. The exit is expected to be EBIT accretive from FY '27 with no material cost sale. Approximately 3% of sales will leave the Adairs base, so reported growth in FY '27 will optically soften. In the pack, Appendix 4 sets out the continuing basis comparatives. And on that point, I'll hand back to Elle for the strategy update and the outlook.

Thanks, Matt. Turning to the brands and starting with Adairs. FY '26, the product transformation was concentrated in categories Adairs is best known for, our soft furnishing category. Soft Furnishings delivered 4.6% sales growth for the full year with gross margin dollars improving by 6% with an improvement of 100 bps. Soft furnishings in the first half, sales increased 3.5%, whilst gross margin dollars were 3.4%, down 10 bps, primarily reflecting the increased clearance activity to discontinue inventory. The second half is where we really began to see the impact of the product transformation and the new strategy executed. Sales growth accelerated to 5.6% increase, whilst gross margin dollars increased 8.5%, representing 190 bps improvement. Importantly, this demonstrates the quality of sales performance as we move through to the transformation with growth being delivered alongside meaningful margin expansion. These categories underpin the second half gross margin recovery Matt discussed. Two other points, the Linen Lovers held at around 1 million paying members contributing more than 80% of Adairs' sales with the Qantas Frequent Flyer partnership now a meaningful driver of new member acquisition. The Store of the Future format pilot at Bondi Junction delivered customer conversion approximately 400 basis points above comparison stores, and it is earmarked for rollout from FY '27 into the homemaker and large format network. Slide 15, Mocka and turning to Mocka, the 4 categories launched during the year of outdoor, youth, lighting and sofas delivered about $3.2 million of sales, broadening Mocka from a nursery and kid specialist toward a whole of home offer. Impressively, the Australian website was up 26% and transactions up 18% on last year. Pleasingly, Mocka opened its first physical stores, Maroochydore in Queensland in June and Tower Junction in Christchurch in July. This is a deliberate test and learn. Further stores contingent on the performance of these sites with early positive signs. Slide 17, Focus on Furniture, the 2-year turnaround. Focus on Furniture turnaround sequence across FY '27 and FY '28 applies the same framework approach as Adairs and Mocka. There are 3 strategic pillars that we are driving. Product and range renewal, which is exclusive designer collection with regular units, a clear category pricing architecture in place of ad hoc discounting and a broader supply base. The brand and customer are prioritizing stock availability and a clear value with a refreshed brand platform, disciplined trading calendar and rebuilt website and upgrade CRM, retail execution, structured selling skills, the new in-store incentive scheme, rosters matched to demand, a progressive refurbishment of the Frankston format, which outperformed the network as this is the refurbishment template going forward. On timing, the first half of FY '27 will be difficult as the weaker fourth quarter order book carries into the new financial year and stock recovers. Benefits are expected to emerge from the later part of FY '27 and build into FY '28 with EBIT recovery over the medium term. The store reset is funded with limited capital expenditure, and we remain committed to a national network of 40 to 50 stores over approximately 5 years from 27 stores that we have today. Sequence behind the product reset. Now Slide 21 to 22 is Vision 2030. So turning to strategy. Within 2030, it gives us a longer-term framework for growth for where we invest, how we allocate capital and how we create value over time. Retail will always demand short-term discipline of the trading results, planning promotional cycles, disciplined inventory management and delivering seasonal performance. And while short-term discipline helps you manage the business, it doesn't necessarily help you build it, and that's really what Vision 2030 is for. It is one strategic framework across 3 brands, recognizing that each brand serves a different customer and plays a different role in the portfolio. But at its core, it's about building stronger businesses. And the framework rests on 3 pillars. It's about product and brand, it's about being design-led exclusive products, winning in the category that we're famous for with pricing discipline over promotional intensity, supporting higher and more predictable margins. It is about customer obsession about superior in-store experience, deeper insight and personalization and a connected omnichannel offer, supporting higher lifetime value and lower acquisition costs and ways of doing business. It's about structural productivity, exiting what does not earn its place and sharing group expertise. The sequence delivered at Adairs this year, raise elevation margin recovery, inventory productivity and cost discipline is the same sequence now being applied at Focus, supported by group experience. Slide 22 sets out the priorities by brand. For Adairs, to elevate the brand proposition to our customers' channel of choice and simplify the way we go about our business, continuing to reduce complexity in our operating model and finding cost efficiencies. For Mocka, continue to grow the brand awareness and customer accessibility whilst building the capability enablement for growth. And for Focus, we're resetting the brand and the operating model, and we will rejuvenate our stores and our products, and we are encouraged by the progress and there is a lot more to do. Slide 24, FY '27 trading update and outlook. In the first 8 weeks of FY '27, group sales, excluding the exited Adairs New Zealand business were down 4.5% on the prior year. Adairs real-time sales were steady at plus 0.4%. However, there are material timing differences in the period. We are cycling heavy clearance activity in the prior year and a Linen Lovers event was moved to derisk the ERP implementation. So given the event timing and clearance comparison, the first 8 weeks are not representative of the full year. Our internal analysis puts underlying Australian sales growth at approximately plus 2% over the 8 weeks with gross margin ahead of the prior year. Mocka Real-time sales were up 15.3% with Australian momentum continuing and Maroochydore and Tower Junction trading in line with expectations. Focus written sales were down 27.6%. The inventory and availability issues in the fourth quarter have carried into the new year as flagged and are expected to recover through the second quarter. The order book was $11.8 million at week 8, up $0.6 million since June, but below the $13.4 million at the same point last year. On the outlook, FY '27 is focused on earnings quality, moderate margin expansion, cost productivity and disciplined capital allocation. The new Adairs ERP system goes live in early FY '27 with implementation risk being actively managed. Focus expects a difficult first half with turnaround benefits emerging in the second half. On the store network, Adairs plans 7 to 10 new stores, 4 to 6 upsizes or refurbishments and 2 to 5 closures. Mocka has 2 stores trading and in Q3 opened Mornington in Victoria with further stores contingent on the pilot. Focus has no new stores planned. There are 2 relocations and 5 to 10 light refreshes and group capital expenditure of $25 million to $30 million, approximately half of which is uncommitted. On currency, around 70% of FY '27 U.S. dollar requirements are hedged at $0.674 against an effective $0.664 in FY '26, and we are not providing FY '27 earnings guidance. Before we take your questions, what we control is how we listen and respond to our customers and the experience we provide them. It's the quality of our ranges, the discipline of our pricing, the productivity of our stores and supply chain and how we carefully allocate capital, and that's exactly where our priority sits heading into FY '27. And the Adairs and Mocka show this year what that discipline can produce, and we are applying that same rigor to Focus on Furniture with our eyes wide open about how long that will take. I'm optimistic about what this business can become and clear that it will be earned and not assumed. And with that, Matt and I will welcome your questions. Operator, please open the line.

[Operator Instructions] And the first question will come from Aryan Norozi with Jarden.

First one, please. Just on the Adairs -- brand Adairs gross margin. So it was about just over 61% in the second half of fiscal '26. Just looking back, I think in Feb this year, you sort of mentioned the aspiration was to get that gross margin back to fiscal '24 levels of around 63%, and that was before FX benefits. Just wanted to see what the new or revised thinking is for FY '27 in terms of the gross margin benefits and obviously, overlaying FX on that, too, please.

I think at the half, we said, yes, aspirationally, we want to get to 62%. We've quoted the FX rate on the outlook page. So you can calculate what that would work to in bps. That would be about 60 to 80 bps, just calculating to the FX. As Elle said, we are focused on pricing discipline and promotional depth. So that's about as far as we would sit there on a gross margin position.

Sorry, did you say the FX is a 60 to 80 basis point benefit in FY '27?

At the group, yes, based on that one term, yes.

Okay. But in terms of brand Adairs, isn't it more like a 150 basis point benefit to your gross margin just given the hedge rates?

Broadly similar across the brands, Ari.

Okay. So the thinking is into fiscal '27, 62% is the sort of base margin you're aspiring to. And then on top of that, you've got a 60 to 80 basis point benefit. So sort of 63-odd percent.

That's your model, not our guidance, Ari.

Yes, got you. Perfect. And then second question, just on Focus. I mean, in the first 8 weeks, you're down 28%. Obviously, there's some sort of inventory availability issues. How do we think about the cadence of the declines into the second quarter, just given the order bank? Is the way to think about it, Q2 is going to still be down 20% plus. And then from third quarter onwards, you can get back into growth or stabilize the business, please?