The S&P/ASX 200 Index (ASX: XJO) has lifted by around 12% since the end of September 2022. Delivering an annual return in just two months is quite the share market rally. But it could still be a good hunting ground for cheap ASX shares.
Some businesses still have low price/earnings (p/e) ratios despite investors pushing through a bit of a recovery for share prices.
The retail sector has gone through a tough time this year. Not only do higher interest rates hurt the valuation of companies, but lower demand by consumers could hurt businesses even more.
While there may be more volatility ahead, here's why I think investing in the following two cheap ASX shares during this rally could make sense.
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Adairs Ltd (ASX: ADH)
Adairs is a leading retailer of homewares and furniture through three different brands: Adairs, Mocka, and Focus on Furniture.
In terms of the Adairs share price, the ASX share has dropped by more than 40% this year to date. This puts the valuation at just 8x FY23's estimated earnings.
I think that the cheap ASX share has plenty of long-term potential for returns. It has identified several locations where demographics would "clearly support" new stores, which will be larger ones.
The company hopes that more retail floor space will lead to stronger margins and more members. Management says there is a strong link between membership numbers and sales, as well as between store floor space and sales.
Mocka has been an online-only company, and sales have grown by between 30% to 35% in four of the last five years. But, it's now expecting to establish a brick-and-mortar presence to leverage the benefits of an omni-channel strategy in time. There could be good synergies between Mocka and the acquired Focus on Furniture business. Mocka sales are expected to be at least $150 million annually within five years.
Adairs thinks Focus on Furniture can grow its store network from 23 to between 50 to 60 across Australia. This could "result in annual sales of circa $250 million" for the company when it generated $121 million in FY22.
The cheap ASX share could pay a grossed-up dividend yield of 11.4% in FY23.
Shaver Shop Group Ltd (ASX: SSG)
Shaver Shop is another retail ASX share. It is a part of the $10 billion beauty and personal care market in Australia – this market is expected to grow to $12 billion by 2026. The company says that it sells some of the "most innovative and technically advanced products" in its categories.
Interestingly, in FY22, exclusive products generated more than 50% of sales and around 60% of gross profit.
The company wants to continue to expand its ranges and products on offer. It's planning to expand its New Zealand store presence. The business also noted recently that it had a "clean" inventory position with no material supply chain concerns.
While online sales may dip, store sales have recovered as shoppers resume normal shopping behaviour.
According to Commsec, the Shaver Shop share price is valued at under 9x FY23's estimated earnings. The cheap ASX share could pay a grossed-up dividend yield of 13.1% in the current financial year.
