Adairs is a shining light in homewares
Macro news has a habit of encouraging bad investment decisions. Investors focus on top-down news and extrapolate it to all companies, overlooking opportunities or making rash decisions.
Homeware is a case in point. Never-ending gloom about consumer sentiment, low retail sales growth and online competition was an awful backdrop for homeware stocks. Yet several starred in 2019 because they capitalised on emerging consumer trends.
Temple & Webster Group (TPW), an online homeware retailer, delivered a 146% total return over one year, Morningstar data shows. Investors who bought at the low of 93 cents in early 2019, when retail Armageddon was supposedly upon us, have more than tripled their money.
Temple & Webster
Kogan.com (KGN) has an 85% total return over one year. The popular online retailer is benefitting from rapid growth in e-commerce and its expanding product range. Kogan.com soared from a 52-week low of $3.02 to $7.79, as the economy slowed.
Sceptics might argue that Temple & Webster and Kogan.com are exceptions because of their online focus. Not so. Adairs (ADH), a mostly bricks-and-mortar homeware retailer, has a 34% return (including dividends) over 12 months, and solid gains over three years.
Nick Scali (NCK), one of this column’s favoured small-caps, has a 46% total return over one year. So much for the Reserve Bank’s 2019 research highlighting falling sales of cars and furniture as cash-strapped consumers cut back on big-ticket items.
Breville Group (BRG), an innovative kitchen-appliance maker, has an 83% return over one year – or more than three times the return from the ASX 200 in 2019.
Even perennial underperformer, Myer Holdings (MYR), posted a 36% total return over on years, albeit after years of horrendous falls. Myer is one of this column’s preferred small-cap ideas in 2020 based on its potential for greater store rationalisation and efficiency gains.
Not all homeware stocks starred. Beacon Lighting Group (BLX) had a 6.3% total return and OneAll International (1AL), an outdoor-furniture company, had a slightly negative return.
But the collective performance of homeware companies defied expectation, again proving that strong companies can grow profits in good and bad markets. And that investors must screen out market noise and media reports on economic doom and gloom in their decisions.
Can the gains continue?
I like the outlook for listed homeware companies on a few fronts. First, rising house and share prices are boosting the so-called “wealth effect”, making consumers feel richer on paper and more inclined to buy homeware and other goods.
Household new wealth rose, on a per capita basis, at its fastest rate in two years in the September 2019 quarter, Australian Bureau of Statistics data shows. That should encourage consumers to buy homeware and other mid-size purchases.
Rising property prices are important for homeware. As homeowners see the value of their house increase, on paper at least, they feel more confident to renovate parts of their property or upgrade its look with new homeware. A steady diet of home-renovation TV shows continues to drive people into homeware stores, judging by the sector’s share-price gains.
Low wages growth and high household debt, of course, are persistent headwinds for retail demand. But the likes of Adairs, Temple & Webster and in some categories, Kogan.com, are appealing to consumers who are favouring mid-priced homeware.
I suspect the Netflix/Uber/home-delivered food boom is adding to homeware demand. As more people order food online and watch video-streaming services – and “cocoon” at home rather than go out as much – they want a nicer couch and better flat-screen TV. And feel they can afford them because they are spending less on eating out or going to the movies.
Online growth is another factor. Temple & Webster and Kogan.com are well positioned for e-commerce growth, but other listed homeware companies have far lower online penetration. That’s an opportunity for them to crank up sales through online channels.
Which homeware stocks offer value?
Although Kogan.com’s strategy and implementation impresses, a trailing Price Earnings (PE) ratio of 35 times, almost double the market average, is high for a small-cap retailer. Having missed its rally, I’d prefer to stand aside at the current valuation.
I have a similar view on Temple & Webster. Year-on-year revenue growth of 41% in depressed housing and retail markets is a good effort and vindication of its strategy and management. The company has a strong product offering and clever e-marketing.
However, a market capitalisation of $352 million for a business with underlying earnings of $1.1 million in FY 19 and $13.5 million in cash is too much for me. The valuation is factoring in rapid growth in the online homeware market and Temple & Webster expanding quickly.
Breville, too, looks fully priced, despite its innovation record, brand strength and expanding global footprint. At $19.69, Breville trades on a forecast PE multiple of 30 times FY20 earnings, on Morningstar numbers. That’s too high for me, even for such a high-quality company.
Adairs is the pick of homeware stock at current prices. I rate its acquisition of Mocka, a pure-play online home and living products retailer in Australia and New Zealand, for $75.5 million. Adairs completed the acquisition in December 2019.
Mocka is a neat fit with Adairs. Its online strengths complement Adairs’ bricks-and-mortar business. Adairs should be able to market Mocka to a larger customer base and drive a step-change in the combined company’s online penetration rate in homeware. Done well, that could drive faster revenue growth and underpin a re-rating of Adairs in the next three years.
Beacon Lighting Group also deserves a spot on portfolio watchlists of experienced investors who are comfortable with micro-caps. Beacon announced record sales of $241 million in FY19, up 2.5% on a year earlier, but after-tax net profit fell 17% to $16.2 million.
Interesting in home-lighting seems to build each year as homeowners spend more on trendy lamps and overhead lights. Beacon has a good brand in lighting, 113 stores and 433,000 customers in its database. The company has overseas growth opportunities and its emerging businesses in solar lighting and street lighting are growing quickly.
I suspect the market is overlooking Beacon’s operational progress, as often happens with micro-cap companies that disappoint with profit downgrades. Few broking firms cover Beacon and it seems to have lost market profile in the past few years.
That could be an opportunity for private equity to acquire Beacon, privatise it, restructure the business and bring it back to the market in a few years at a higher valuation. That’s all speculation, of course, but Beacon should shine a little brighter in 2020 as the property market recovers.
Beacon Lighting Group