Adairs Ltd (ASX:ADH) shareholders will be thinking their Melbourne Cup hangovers have come back with Adairs’ share price pllunging by over 40% on today’s trading update.So what exactly when wrong?
Looking at the trading update we can see that they lay the blame at misreading the trends for bedlinen. Disappointingly for shareholders bedlinen makes up 40% of sales but the good new is that non-bedlinen (60%) has been trading as forecast.
So what does this mean? Basically as Adairs was holding bedlinen which was not considered currently “in style” they needed to sell what they had at greatly reduced prices. So this resulted in a lower margin of profit for each sale. Things are not all bad we also learnt that Adhairs customer base continued to grow. The question is whether this was normal trend or brought about purely by current discounting.
So the question investors must now be asking themselves is this the beginning of the end for Adairs or has the market over reacted to which could amount to a one off mistake?
Taking into account todays fall Adairs now trades on a forward PE of just 11 and a dividend yield of 7% full franked. This is of course if the dividend is maintained.
Conclusion
Taking the update at face value in my opinion the sell off looks over done. It appears to me that with the heightened nervous around the US election the market is taking it anger out on any company it views as underperforming.