What the results of Supercheap and Adairs tell us about the distribution sector « ROGER MONTGOMERY


What the results of Supercheap and Adairs tell us about the retail sector

Some retailers – such as Supercheap Auto (ASX:SUL) – are reporting better than expected results this reporting season. But that hasn’t stopped many analysts from painting a gloomy picture of the retail sector, largely due to the impact of rising interest rates and inflation on consumers’ wallets. . If they’re right, investors don’t need to rush.

The risk of forming a “circular reference” is all too obvious to me; analysts and commentators talk about the difficulties consumers are facing with rising mortgage interest rates, fuel, food and utility prices. Corporate CEOs consume the same media and tell the same stories.

And then comes the result of Supercheap Auto. The company surprised attentive investors, reporting more resilient than expected FY22 earnings. Sales, margins and EBIT were all above the number around which most analysts had pegged. All four of the company’s brands posted strong sales in the second half of FY22, and group sales rose 5%, comfortably beating analysts’ estimates.

Supercheap then added a solid first six weeks of FY23 to their story. While like-for-like group sales are impacted by the lockdowns in the prior corresponding period, they increased by 17% for the first month and a half of FY23. Breaking down the period by business segment, automotive business sales up 15%, Rebel Sport up 13%, Boating Camping and Fishing up 17% and Macpac up 42%.

In other words, the second half of last year was strong, and that strength has continued this year.

However, after reading the same negative commentary as the rest of us, the company was not optimistic, noting: “while current trading remains strong, the group expects rising interest rates and the cost of living to begin to impact consumer spending”.

And of course, that commentary then feeds into the narrative that is already unfolding.

In my opinion, there is a risk that investors and CEOs are so afraid of an uncertain future that they ignore a very certain opportunity.

But just as I was rationalizing a more optimistic disposition, Adairs (ASX:ADH) reported its results with the following highlights…

Adairs brand sales in the second half were flat year-over-year. The gross margin of 58.7% was weaker than expected, as were the EBIT and EBIT margins. Perhaps most surprising was Mocka’s 8% decline in sales compared to growth expectations, and gross margins well below expectations due to increased supply chain costs and clearance. Group-wide inventory was also elevated.

It was a mixed result with second-half NPAT down 11% from growth expectations, and second-half Adairs and Mocka sales below expectations.

Maybe the bearish narrative is right. With even Supercheap’s share price four percent below the day it reported, investors may be wise to keep an eye on the narrative. Only when that changes will good news be good news.


Roger is the founder and Chief Investment Officer of Montgomery Investment Management. Roger brings over three decades of investment and capital markets experience, knowledge and connections to his role as Chief Investment Officer. Prior to founding Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was written by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The main purpose of this article is to provide factual information and not to provide advice on financial products. Furthermore, the information provided is not intended to provide a recommendation or an opinion on a financial product. However, any commentary and statement of opinion may contain only general advice prepared without regard to your personal objectives, financial situation or needs. For this reason, before acting on any of the information provided, you should always consider its suitability in light of your personal objectives, financial situation and needs and should consider seeking independent advice from a financial adviser if necessary before making any decision. This post specifically excludes personal advice.


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