Ann: ADH Trading Update, page-44

Whilst I am a fan of Adairs, you cannot hold back the tide of negativity in the entire retail chain.
I spent all of the last weekend considering ADH and other retailers and came to the conclusion that I would exit entirely on Monday. A number of companies have issued warnings including Adairs, Super Retail, Nick Scarli, JB-HiFi, Michael Hill Jeweller, City Chix, Lovisa, Universal, and WES (owners of Bunnings).Eight reasons formed the basis of my decision and I throw them out there for discussion and consideration because I certainly intend to re-enter ADH when the recessionary mood begins to abate and ADH clarify the major problem they have with the Mocka goodwill.

(1) Inflationary effects on domestic household budgets

(2) Higher costs of servicing household interest burden driven by (a) increasing interest rates to date and likely continuing into the future (b) massive interest rate increases by the rollover of previously fixed rates at around 3% to close to 6% - massively increasing over the next six months (c) Strict APRA rules on ensuring new loans be stress proofed at 3% over current home loans rates of around 6% will restrict the volume and quantum of future loans

(3) Falling domestic dwelling construction (April 2023 down 8.1%) and liquidation problems in this industry presently. Adairs is a beneficiary of the need for hard and soft furnishings in these new dwellings

(4) Effective increase in wages by 6.25% by Fair Work Commission (June 2023) will push ADH wages as a percentage of sales from 19.4% to 20.6%

(5) Current hedging at around 72c USD will run out end of year and the direction of the AUD/USD is likely down – currently 66c

(6) The diabolical performance of Mocka – a likely FY23 EBIT of ZERO on an asset with a book value for goodwill and brand of around $72m – the results get worse each six months and the company has now had 4 half yearly time periods since ditching the previous owners to make an improvement, instead it steadily gets worse.

(7) A total write off of the Mocka goodwill will take the net debt as a percentage of net debt plus equity to around 40%. Might raise the banks risk level and thus interest rate to be assessed on the $75m debt facility due to be renewed in July 2023

(8) Very likely a partial to significant Mocka Goodwill and brand acquisition write off in FY23 or FY24 (discussions with auditors probably happening right now as already foreshadowed in the fine print to the 1HFY23 results as follows:

“The cash flow forecastsassumed for the FY23 year reflect a substantial reduction on those applied inthe previous impairment test at 26 June 2022 given the actual operatingperformance of Mocka for the 26 weeks ended 25 December 2022.”

And

“Theabove sensitivities in isolation do not result in an impairment of the MockaCGU at 25 December 2022. However, additional adverse changes to any of theabove key assumptions may result in the carrying value of the Mocka CGUexceeding its recoverable amount” Note the adverse conditions have emerged in 2hby my calculations as based on the recent trading update.

The NDC schmozzle and a still uncertain online distribution chanel is another area of concern.