daicosisgod @KloggSo in question time today Scott Morrison...

daicosisgod @Klogg

So in question time today Scott Morrison suggested that Jobkeeper will continue for 6 months, although a formal review will occur at the end of July. I think for business certainty it seems improbable that winding it back will be possible, but who knows- irrespectively that is at least 4 months of wages. Adairs management previously stated on one of the conference calls that it would cover 80-90% of the wage bill (particularly with the cuts elsewhere for the timebeing). As such- jobkeeper is going to result in net cashflow to the business of 24-36 million, of which none has so far been received. I am working off the assumption that rent will be down about 10-20% across the board moving forward, as that seems to be what listed REITs as well as banks have so far disclosed. So rental arrears of 2.5m for the 5 weeks of Covid would result in a net debt position of approximately 22-23m at the end of the lockdown period, which is our last set of disclosed results. Brendan Murphy separately suggested that Australia has achieved effective elimination of the virus.

There are multiple indications that since then (ie in the recent set of reports until end May), sales have gone through the roof- including the disclosed reports of pureplay onilne retailers such as KGN, as well as Wesfarmers and JB hifi (more staples). In particular, K-Mart homewares was flagged as having higher consumer demand.

There are ways to independently verify that Adairs is actually performing better than these retailers....eg:







And you can repeat the exercise with a number of different retailers. Needless to say...Adairs and Mocka standout as ones with a straight line pointing to the right from February and the percentage growth is much higher than comparable retailers- eg:


The search interest can be independently verified-showing a background steady growth trend and then a massive churn event with increased market share for the online division of Adairs (compared to its stores), but also from competitors.




Finally, Adairs have also implemented changes to their website (stockinstore) allowing seeing what is happening with stock both online as well as in-store in real time...stuff appears to be flying off the shelves.

They are doing well across multiple demographics- although pinterest and facebook appear to be more important digital channels, instagram is growing strongly- with an accelerated background trend during the Covid period, which bodes well for the millenial demographic that channel corresponds to (from hypeauditor below):


Finally Adairs appears to be confident in the business moving forward, on top of the numerous director purchases on market, there have been quite a number of job ads, which is much higher than retail counterparts (https://advanceatadairs.worldmanager.com/careers/)

So in summary:
- on trackable metrics, Adairs seems to be doing better than comparable retailers, who have already annouced higher profits this FY than expected
- Unlike many of these other retailers, Adairs appears eligible for Jobkeeper- and stands to receive a signifant sum- potentially 10-15% of its current market capitalisation in cash
- They appear to not have squandered the opportunity, with discernible improvements to their digital offering in the last 2 months

I think my previous scenarios were potentially too pessimistic. It appears, on the basis of the currently available data, that the shift in consumer spend away from travel, entertainment and hospitality, has benefitted consumer discretionary, and Adairs seems to have benefitted on top of this, by having particularly good employees and management, resulting in susbtantially improved market share in a decimated retail landscape. Consequently, there is every possibility that top line sales are actually better than guidance, and assuming that margins are maintained EBIT of >50m for the FY is distinctly possible (not including jobkeeper). When you add in Jobkeeper, the turnaround could be even more impressive. If this occurs- management would almost certainly hit their incentive targets, shoppers appear to have been delighted and we, as shareholders, could actually even have resumption of dividends....MUCH sooner than anticipated.

If anyone has any empiric data (ie not opinion or theory) that suggests that I am wrong here, I would be extremely interested to know, however nearly everything is saying the same thing- the consumer is healthy, discretionary spending is healthy, and the fiscal support packages have done their job. In particular, if the fiscal support packages help repair company balance sheets- business confidence will in turn improve, and growing businesses will have access to a talented and capable workforce to continue their trajectory. More and more, market movements in March appear to be completely out of touch with the real economic outcomes.

Although this is over 3x when i first bought in and over 2x my average price, my conviction is stronger than ever. I have alluded to this before, but when the market finally catches on to the annuity style revenue streams that a captured customer base represents and the fact that Covid has absolutely decimated competitors (online retailers that simply white-labelled manufactured goods and dropshipped have learnt about supply chains the hard way, and physical retailers that never developed an online presence have died). The survivors are pure-play online retailers and omnichannel retailers. The latter have had forced closure of physical stores + focus + a helping hand from the government, which has allowed rapid improvement in the online offering (IMO their online offering is as good as, and in fact better than pureplay online retailers). Moving forward, customer acquisition is tricky as digital CAC (or digital rent) is very high and will equilibrate with physical rent after this particular episode, leading to significant advantages for the survivors that resonate with a particular customer base- of which Adairs is the archetypal example. I suspect, we will look back in a few years time, when consumer brands are powering along for these reasons and multiple rerating has occurred on the back of significant topline growth and operating margin improvement, and wonder what people were thinking in these times....