@Klogg I think it is too early to make definitive judgments on...

@Klogg I think it is too early to make definitive judgments on what will happen moving forward. I suspect there will have been temporary spend changes as a result of Covid, but the truly better customer experience will eventually win out.

There are two key things that the market hasn't recognised properly to do with the past (ie already happened), probably due to obfuscation due to AASB changes.

		FY16	H117	H217	FY17	H118	H218	FY18	H119	H219	FY19	H120
1	Occ+D&A	14.7%	16.7%	15.7%	16.1%	15.5%	14.2%	14.8%	15.1%	14.2%	14.6%	13.1%

Basically landlords started seeing the writing on the wall with regards to impact of online from about 2018 as retailers kept falling over and it became a bit more competitive attracting quality tenants. They started fronting some of the capex costs to be shared with retailers on new leases as well as dropped rents. What this has resulted in is 2 things:

1) Total spend on keeping stores open coming down over time- which will accelerate with Covid. I can't see any further drop moving forward (I mean technically online had 100% of the total retail spend in the last 6 weeks, it just can't take any more market share)
2) FCF conversion will be higher moving forward as capex spend is distributed more fairly, but the run-off D&A from the old lease agreements is still making its way into the cashflow statement.
--> the end result of this is that this is a form of mean reversion in industry profits, and retailers are going to have a very solid base moving forward to demonstrate their value proposition, with excellent FCF cover.

It will be interesting to see how much latent demand is fulfilled in the next month and a half. There is a pretty reasonable chance that across the 2 brands, there is quite a significant clawback of sales that were just ignored, and the clean inventory position is a good place to be in right now.

Some semblance of normality is nearly certain to resume, even if there was a sustained 30% drop in sales (which seems extraordinarily unlikely), the strength in the lower price point Mocka business and the online business gives enormous protectio, and government policy has effectively turned most of the fixed costs variable. I cannot see anything lower than 25m EBIT in FY21, which still places this on a 10x multiple. The market seems to love recurring revenue- it seems to have forgotten that the decades long attraction of consumer brands (prior to online churn event) is this precise reason. More importantly, people just do not have the time or energy to sample hundreds of products- they need a curator. The strength of linen lovers attests to this phenomenon. At the end of the day- as a consumer you defer your decision to the curator depending on your priority- Amazon/TPW/Kogan etc- convenience at a low/fair price, department stores where you want to see a range of goods with a view to buying something in that category at a slightly higher price, niche brands- trusted brands that resonate on a quality + price range with their designated consumer. Most importantly, as physical retailers continue to have exclusive ranges, you just cannot buy cheaper online any more. Moreover, if you don't have a physical footprint, you cannot show off your product to your customer. Mean reversion will be back at play.

I am going to go out on a limb here and say that this is the absolute worst of the physical retail cycle. Unlike when I luckily managed to strike the bottom of mining crash with MND in 2015- Adairs has somehow managed to grow market share and gross margin dollars at the bottom of the cycle....what will happen when the cycle turns? Usually, in my experience, cyclicals confer the best returns at high PE multiples at the bottom of the cycle. In this instance, you are potentially buying one of the best retailers (at least at a performance level, and certainly at a global level- eg compare with BBBY or split out Williams Sonoma ex West-Elm to see the relative quality of Adairs; in this current cycle) at the bottom of the cycle on a single digit multiple, after there is already some evidence that the cycle has turned....

Anyway, my thoughts only. Will be interesting to see if I am correct- been wrong too many times before!