Retailing icon set for big jump

The fortunes of Australia’s retailing industry are closely linked to the cost of money within the economy.

The fortunes of Australia’s retailing industry are closely linked to the cost of money within the economy. For the past three decades, sales growth rates within the retailing sector have fluctuated in reasonable proximity to the Reserve Bank’s cash target rate. At any given time, the ratio of retail sales growth stands between half to two times the cash rate. In the past a ratio running towards the upper end of this range has preceded a period of interest rate tightening by the RBA, the industry has been granted a reprieve during 2015.

Despite retail sales expanding at twice the benchmark interest rate during 2014, the RBA has extended a loosening cycle that began during 2011, cutting interest rates twice so far this year. The rate cuts have been a boon for household goods vendors, which have witnessed sales growth rates double the retail industry’s average in 2015.

The forthcoming listing of home furnishings retailer Adairs offers investors exposure to the trend. Adairs specialises in so-called Manchester, this is homewares and other soft furnishings. Among the key assets at the group is a national retail network of 131 stores; vertically integrated product design, development, sourcing, and distribution supply chain; and a customer loyalty program with 373,000 members. Adairs retail origins span back to 1918.

With Adairs’ listing representing a selldown by existing shareholders, incentive for new investors is provided by its record of profitable growth. Adairs is on course to generate its fourth consecutive year of higher sales and earnings during the 2016 financial year. Market share gains and margin improvements have potential to sustain the trend. Adairs is currently targeting 8-12 net new store openings in Australia each year for the next five years and has completed scoping studies into New Zealand and South Africa for further expansion opportunities. Planned supply-chain investments totalling $2.3 million could also generate cost savings.

Primary risks surrounding the float include Adairs’ vulnerability to changes in consumer discretionary spending, and execution of its expansion plans. Should the consumer cycle remain favourable and Adairs’ retain a competitive edge, the outlook favours a mix of income and modest capital growth.

Tim Morris is an analyst with wise-owl.com.

Adairs

ASX Code: ADH

Shares on Offer: 90.9 million

Listing Price: $2.40

Market Capitalisation: $398.1m

Listing Date: June 17