This business is over 100 years old. I have no doubt the vendors...

This business is over 100 years old. I have no doubt the vendors of Mocka sold to Adairs because they are honest retailers that would protect the business they created and not take unnecessary risk.

The absolute correct thing to do in an emergency situation is to protect your options, act decisively to the known information preparing for the worst and then if there is a positive outcome, benefit anyway.
Since it’s listing- it has achieved a lot- including significant expansion geographically, online and in its product offer. If you zoom out, sales have tripled over the last decade- this is no mean feat. This is against a backdrop of savage competition by overseas entrants and waves of voluntary administration by less nimble players in a competitive space being destroyed by cheap online competitors. The problem with online, is that it is actually predominantly a distribution platform and doesn’t work to generate sales when you don’t have familiarity with the product. Online players have functionally cannibalised commodity products by offering one size fits all for the price conscious customer. However, monopoly rent seeking by Google/Facebook/platforms means the margins are not as good as they were previously so customer acquisition costs become insurmountable for new entrants. Moreover, good retailers, have responded by bringing design in house and protecting IP with exclusive ranges. This virus is the final nail allowing for retail profitability- bringing ridiculous rents down to more acceptable levels. At the end of the day- people like to touch and feel products they buy and the human touch of sales in a retail environment do matter to some degree. We will know long term just how much - but online isn’t going to get to 100% of the market share for desirable products.

The share price is merely a reflection of the prices buyers and sellers are willing to transact at. PE multiples will mean revert at some stage- we are closer to the bottom of the cycle in retail than the top. Single digit earnings multiples imply shrinking cashflows into the future. Ask yourself, with the known information, what evidence is there that cashflows are going to shrink in the future?

The answer here is close to zero except in a very severe deflationary scenario which seems improbable based on government intervention to date. There is very well telegraphed earnings growth on the online sectors and from Mocka. The increase in linen lovers members in recent times and the visibility for Mocka is going to translate, longer term into recurring revenues. How many other retailers have strong uptake of paid loyalty programs? Almost none- and the examples that do such as Costco, are ones that definitely are worth emulating. The business itself has also grown sales by 3x over the last decade or so. There is well telegraphed improved CODB the following FY.

So why should particularly astute management, of a business that has demonstrated resilience and longevity, a very strong track record of free cashflow generation (typically in excess of reported profits), preservation of capital be on a single digit multiple. At some stage the penny will drop, and the market will change its opinion on this. Sometimes it takes years. In the meantime, there was an opportunity to acquire a century old business, listed on the ASX, in the country that has weathered the current crisis best in the developed world and supported by the economy with the largest fiscal stimulus, which has a highly skilled, diverse and educated workforce and an extremely diverse economy, at book value (or for some even less!). There is always going to be a market for homewares, and Adairs has a much better customer experience than its competitors, so it will do better than most in this environment. Dividends on the other hand, are more likely to resume sooner rather than later- much better than rates you are going to get on a term deposit or probably even from the local bank dividends in the shorter term.