Retail Stock Spotlight: Redbubble (RBL.ASX) & Adairs (ADH.ASX)

This week we take a look at two retailers that have provided robust results for FY20 and are seeing continued strong momentum into the new financial year as the structural shift to e-commerce accelerates. We believe there is more share price upside as valuations catch-up to fundamentals.

Redbubble (RBL.ASX)

RBL is an online marketplace that connects artists around the globe with customers in Europe, North America and Australia. Customers can choose from a large selection of artwork and get it printed on over 115 different product categories. RBL works with over forty global fulfillers who print to order and ship out to customers. 

RBL benefits from the network effect as more available artwork and artists on the platform provide a huge content library which in turn attracts customers to their website. RBL doesn’t hold any inventory and thus benefits from a very favourable working capital cycle which aids cash flows. 

Source: RBL company filings

The company turned profitable last year and has managed to triple its market place revenues since listing six years ago. We believe the business is on the cusp of inflection points in both revenue and earnings growth, as more consumers look to shop online. 

For FY20 RBL reported market place revenues of $368m with Q4 revenues of $122m. The recent update to July FY21 shows revenues up over 130%, to $49m, driven by strong demand for the face mask category. We estimate that RBL generated EBITDA of $6m in July and, if this trend continues, RBL can potentially earn $600m of revenues and $70m of EBITDA. Net cash is estimated at $70m.

Source: RBL company filings

We believe RBL can capitalise on this acceleration of the structural shift to online shopping and expand its product categories further (they currently have 115 products) and look to enter Asian markets. Regardless, the opportunity in North America alone is enormous.

Source: RBL company filings

Historically, investors and analysts were hesitant in ascribing RBL a high multiple as the company had a history of volatile trading between quarters. We think, as the company has now reached scale, volatility will reduce and we should see continued growth quarter on quarter.

RBL is currently trading on a revenue multiple of less than 2x, compared to a 3-4x multiple for their closest ASX listed peers, Kogan (KGN.ASX) and Temple&Webster (TPW.ASX), and 10x for global peer Etsy. We view the market consensus as too low for this year and next and we see analysts playing catch-up as the company provides further updates. A combination of consensus upgrades and a multiple expansion is the perfect recipe for significant valuation upside in the next twelve months. We value RBL at about $5.00.

​Adairs (ADH.ASX)

ADH is a homeware and accessories retailer under the Adairs name and a baby furniture and homewares brand via the online only Mocka. Historically, the market priced Adairs as a bricks and mortar retailer with an online store. But with the ongoing shift to online and the acquisition of Mocka, ADH now boasts 35% of group sales from the online space.

​We believe ADH will continue to benefit from consumers staying at home more as Covid-19 lingers (wear masks where appropriate people!) and, in some cases, are forced to stay home as with the Victorian lockdowns. Recent trends suggest that those cocooned consumers spend more on their homes and ADH is a direct beneficiary. The shift toward online sales has been mentioned and it is worth mentioning that 30% of online sales during lockdowns came from new customers. This suggests that ADH is winning market share from physical retail store operators.

Source: ADH company filings

FY20 results exceeded expectations with revenues up 13% to $390m but both EBIT and NPAT significantly exceeding expectations by 20%, with $63m EBIT and $35m NPAT. Online sales were up 110%, with Adairs sales up 60% and Mocka sales up 30%. Pleasingly, FY21 has started strongly with the first five weeks showing group sales up 32%, online sales up 103% and like for like store sales up 16%.

Source: ADH company filings

ADH has negligible debt and is well positioned to grow and pay higher dividends next year. We estimate FY21 EBIT of $70m with EPS of 26 cents and a fully franked dividend yield of 5%. We think investors will gradually price ADH on an online retailer multiple rather than a more traditional brick and mortar one. We value ADH at $3.60.