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ADAIRS LIMITED Interim / Quarterly Report 2017

Feb 26, 2017

64302_rns_2017-02-26_60f2c648-7730-4271-8e88-8b4338250984.pdf

Interim / Quarterly Report

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1H FY17 results presentation

27 February 2017

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1H FY17 results snapshot

Sales $124.5m

up 5.7%

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EBIT $12.0m Down 39.6%

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Gross profit margin 59.3% PCP 62.9%

NPAT $8.6m Down 35.3%

LFL sales -4.0% Cycling +15.4% pcp

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CODB

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47.4% of sales up from 43.8%

INTERIM DIV 3.5 cps fully franked

Variances refer to 1H FY17 highlights compared to 1H FY16 highlights

1

Agenda

1. 1H17 Business Overview

1H17 Financial Performance
Strategic Update
2H17 Outlook

1H17: Snapshot

1H17 financial performance was disappointing

Sales up 5.7% vs pcp to $124.5m
LFL sales down -4% (cycling +15.4% in pcp)
Issues most acute in Bed Linen product category, and geographically in northern states
Online sales growth: +6.0% (7.4% of total sales)
GM Rate down 360bp to 59.3%
EBIT down 39.6% to $12.0m (9.7% of Sales)
Period end inventory managed to targeted levels and ageing is similar to pcp
Strong operating cash flow from working capital control and improvements in underlying supplier terms

Maintaining momentum of our Australian store rollout program

8 new stores opened in 1H17 – trading profitably
Expect to open up to 3 new stores in 2H17

Strategic capital expenditure undertaken to underpin long term growth

Increased mix of Homemaker format stores – 3 new Homemaker stores
Investment in core business via 4 refurbishments including 1 upsizing to mini homemaker

Key Projects completed:

POS Rollout finalised
Website re-platformed
International expansion commenced into NZ
Two stores now open – both stores trading in line with company expectations
2 stores confirmed to open in 2H

3

Sales Performance

Total sales increase of 5.7% on PCP (but -4% LFL)

Sales ($m)

Driven by:

New stores opened in line with plan
8 new stores in Australia
Refurbished 4 stores
Opened 2 New Zealand stores
Continued growth online +6%, despite growth impacted by product issues and re-platform conversion.

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Loyalty Membership Net Growth

Continuing to grow our Linen Lovers database with growth exceeding 20% on LY
A range of our product categories have grown strongly vs LY, but insufficient to mitigate issues in Bed Linen
Total transaction count up vs LY, but ATV down ~6%

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Sales Performance cont

LFL sales growth

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LFL Sales down 4% with poor trading emerging clearly in 2Q
LFL sales decline was a result of:
Fashion Linen issues that began emerging through first quarter continuing through the second quarter - 1H down LFL 8%
Overall softer Christmas trade, with apparent lower foot traffic experienced on key days across many shopping centers

Expansion vs Traditional Sales mix

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Sales decline felt across all store formats and states, and most acute in northern states
Expansion Categories (vs Traditional) continue to outperform and grow, but were also impacted by lower foot traffic through December

5

Managing Gross Profit Margin

1H17 gross profit margin reduced to 59.3% from 62.9% (vs pcp)
Impacted by:
FX impact on gross margin dollars was a reduction of $3.1m vs pcp (~260bp)
Additional promotional activity to drive sales and clear inventory in underperforming categories
Progress made to protect margin through:
Landed cost price reductions obtained
Improved freight rates
Reduced duty rates

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6

Cost of Doing Business

Group Cost of Doing Business increased as percentage of sales to 47.4%:
Operating costs as a % of sales increased due to declining LFL sales – leverage impact
Wage increases have been offset against productivity efficiencies and reduced hours
Landlord occupancy costs increasing in line with contractual rental increases – impact of 110bp on CODB% on LY
One off costs of $720k for the half with the delivery of 3 major projects during the period – impact of 50bp on CODB % on LY
Controlling variable costs (wages and marketing etc) is a key focus.
The business will continue to invest in implementing our on going strategy to pursue growth

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1H17 Strategic Projects Completed

ERP POS Rollout completed (Microsft Dynamics AX)

All stores trading on the new system and operated smoothly over the key Christmas trading period
Finalising some enhancements over 2H including:
Migration of online stock available for purchase in store to the POS
Enhanced furniture order and delivery capability
Finalising reporting and dynamic dashboard system over 2H
Anticipate ongoing minor enhancements but the major capex has been completed and risk mitigated

Online re-platform – EpiServer

Site speed and conversion metrics improving
Allowed the business to quickly bring up a second site (Adairs.co.nz) in six weeks
Allows business to now start making additional enhancements to drive revenue:
Furniture Online
Buy now pay later
Click and Collect

International expansion strategy into New Zealand

Two stores open – both stores trading ahead of company expectations
Two deals finalised to open in 2H17 – Wellington / Albany
Look to add additional stores into the pipeline given success of first couple of stores
NZ Website is fully functional and trading strongly in line with business performance

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Agenda

1. 1H17 Business Overview

2. 1H17 Financial Performance

Strategic Update
2H17 Outlook

1H17 performance


$ million	1H FY17	1H FY16	Change
Sales	124.5	117.8	5.7%	•	Sales	revenue growth +5.7% vs pcp

Gross Profit	73.9	74.2	0.4%	•	Gross Profit Margin of 59.3% down from
					62.9%
EBITDA	14.8	22.5	34.3%		•	FX negative impact 260bp or $3.1m

EBIT	12.0	19.9	39.6%
				•	CODB as a % of sales of 47.4%
NPAT	8.6	13.3	35.3%		•	Normalised EBIT taking into account
						one off projects would see CODB at
EPS (cps)	5.0	8.0	35.3%			46.9%

DPS (cps)	[3.5]	5.0
				•	Resulting in EBIT decline of 39.6%
LFL sales growth	-4.0%	15.4%

Gross profit margin	59.3%	62.9%		•	EPS has decreased by 35.3%

CODB as % of sales	47.4%	43.8%
				•	Interim dividend declared of [3.5] cents per
EBIT margin	9.7%	16.9%			share

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Strong balance sheet

$ million	1H17	1H16	Change
Trade and Other Receivables	6.9	6.2	10.9%

Inventories	31.1	29.7	4.8%

Trade Payables and Provisions	(37.6)	(27.9)	34.4%

Working Capital	0.4	8.0	95.1%

Cash and equivalents	9.6	7.8	21.7%

Other assets	109.1	108.2	0.8%

PP&E	19.8	13.9	42.4%

Interest bearing liabilities	(41.9)	(41.7)

Other liabilities	(2.0)	(5.2)	61.0%

Net assets	95.0	91.0	4.5%

* 1H17 close 1 January 17 / 1H16 close 27 December			2015

Working Capital decreased on the corresponding period:
Inventory increased c$2.4m pre FX impact on 1H16 to support net 17 new stores
FX impact on valuation of period end inventory decreased $1m vs PCP
• Increase in trade and other payables of $9.6m due to:
- Extended trading terms
- Entry into new markets
- − Timing of tax payments
- − Natural increase due to increased inventory, freight and store expenses
Increased PP&E due to store rollout of 18 new stores and 9 refits/redevelopments
Comfortable gearing • Net debt of $32.2m
• Net debt / equity of 34%
• Net debt / LTM EBITDA of 0.6x

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Cash flow – strong operating cashflows

$ million	1H17	1H16
EBITDA	14.8	22.5

Change in Working Capital / Other	8.5	(3.6)

Capex	(6.5)	(5.5)

Net cash flow before
financing & investing	16.8	13.4
activities and tax

Restructure & Transaction Costs	-	(7.2)

Dividend Paid	(10.8)	-

Interest	(0.9)	(0.9)
Tax Paid	(10.2)	(6.9)

Net cash flow	(5.1)	(1.6)

Strong Cash flow position despite disappointing trading performance with $9.6m cash on hand
Improvement in working capital obtained through negotiation of supplier trading terms
$6.5m Capex spend
10 new stores and 5 store refurbishments/relocations in Australia and New Zealand
Completion of major projects
Additional $10.8m paid in dividend compared to prior half
Additional tax payments due to timing of instalments (which will normalise)

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12

Investing for growth (Capex)

Capital expenditure ($m)

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$6.5m capex compared to $5.5m in 1H16
10 new stores opened in 1H17 (8 in Australia and 2 in New Zealand) vs 5 in 1H16
4 stores refurbished
Continuing to see pleasing results from store refurbishments
Remain committed to ongoing investment in existing stores
Continue to seek opportunities to expand in high performing homemaker centres
Final phase of significant investment in ERP now complete
Other spend includes online replatforming project costs
2H Capex expected to reduce with focus on stores

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Agenda

1. 1H17 Business Overview

2. 1H17 Financial Performance

3. Strategic Update

2H17 Outlook

1H17: Delivering Strategy

Differentiated and innovative product range

We have continued to invest in building capability with additional product manager and merchandising manager.

Accelerating Australian multi store format roll out

Successfully opened 3 Homemaker, 3 Regular and 2 Urban Home Republic stores

Building on Category Range Extension

Expansion Categories have now grown to 38%
Increased proportion of our stores that are Homemakers
Upsized 3 regular stores with 1 converted to “Mini Homemaker” stores

Highly effective Omni channel marketing and online store

Our online business is growing and becoming an increasingly important component of our business
We have implemented a new platform to improve capability and metrics
We have expanded our reach internationally – starting with New Zealand
Our Linen Lovers customer base continues to grow underpinning our customer relationships

International Omni store expansion in New Zealand

Two stores now open – both stores trading ahead of company expectations
New NZ (“.co.nz”) website launched
2 new stores committed to open in 2H with opportunity for more

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Agenda

1. 1H17 Business Overview

2. 1H17 Financial Performance

Strategic Update

4. 2H17 Outlook

FY17 Outlook

FY17 Guidance:

Our revised guidance is provided against the backdrop of emerging but inconclusive signs of improved trading, the ongoing implementation of remedial actions, and the prospect of a continued subdued trading environment

		FY17 Revised
	H2 Guidance	Guidance

Year end store numbers		160 - 165

LFL sales growth	-2% to +2%	-3% to 0%

Total sales ($m)	130 – 140	255 – 265

Gross Margin	58% - 59.5%	58% - 59.5%

Capex ($m)	3.5 – 5	10 – 11.5

FY17 EBIT ($m)1	15 - 20	27 – 32

FY17 EPS (cps)1		11 – 13

(1) Includes costs related to LTIP, NZ launch, POS roll out, and web re-platform

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2H17 Outlook

The continuation of current strategies are still the right direction for the business
While there are early signs of an improvement in the execution of product, the softer retail environment may

extend the time taken to achieve the expected turnaround in LFL sales resulting in a reduction in our guidance

Sales – Guidance reduced to $255m – $265m

Positively we cycle lower LFL sales growth in 2H (8.7%) than we “chased” in 1H (15.4%)
Like for like sales over first 7 weeks of trading down 2% in line with our revised expectations
Fashion Linen - Over the last 3 weeks as the new season ranges started arriving in store we have seen an improvement and expect this will continue to improve over coming months
Whilst sales are improving we are seeing higher than usual volatility across categories.
Online sales continue to grow underpinned by new platform capability and growing Linen Lover customer database
Continue to focus on Linen Lovers customer engagement, which provides us with a fast and effective

communication channel to showcase our new product as it arrives.

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2H17 Outlook

Gross Margin 58.0% - 59.5%:

Gross Margins held to guidance levels and entering the season with no significant inventory build up
Entering the 2H with no significant inventory build up
Currency headwinds are largely neutralised in 2H supported by our current hedge book
Approximately 88% of 2H17 purchases covered at USD/AUD 74.7
Ongoing work with suppliers to obtain further cost price reductions and improved trading terms
We will continue to manage inventory and take decisive action on slow moving lines as they emerge

Cost of Doing Business:

Focus on managing variable costs tightly over the 2H and continue to negotiate store rent terms carefully
The finalisation of the POS rollout allows us to realise some productivity and efficiency gains
Business will continue to invest to build internal capability to support on going growth strategies

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Questions?

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Appendix
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Growing store footprint: +10 in 1H17

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97 - Adairs Stores (incl. Outlet)

41 - Homemaker Stores
11 - Adairs Kids Stores
8 - UHR Stores (inc. 3 Myer concessions)
DC and HQ

1H17 stores refurbished

1H17 new stores

Adairs – Victoria Gardens, Warringah Mall, Toowoomba (‘Mini Homemaker’)

Adairs – Launceston, Port Macquarie, Woden

Adairs Homemaker – Darwin, Gepps Cross, Preston

Adairs Homemaker – Kotara

Urban Home Republic – Moonee Ponds, Brighton

New Zealand – Sylvia Park, Bayfair

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Disclaimer

Some of the information contained in this presentation contains “forward-looking statements” which may not directly or exclusively relate to historical facts. These forward-looking statements reflect Adairs Limited current intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, many of which are outside the control of Adairs Limited.

Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. Because actual results could differ materially from Adairs Limited’s current intentions, plans, expectations, assumptions and beliefs about the future, you are urged to view all forwardlooking statements contained herein with caution.

Adairs' results are reported under International Financial Reporting Standards (IFRS). This presentation also includes certain non-IFRS measures including, “proforma” and “underlying” and “LFL”. These measures are used internally by management to assess the performance of our business. Non-IFRS measures have not been subject to audit or review. All numbers listed as reported comply with IFRS.

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