The Adairs Ltd (ASX: ADH) share price is trading at a 52-week low, with the stock down more than 50% from its 52-week high on 1 February 2023. It's also down by more than 70% from its all-time high in 2021.
It's understandable why the ASX retail share has dropped from the highs, but I'm going to explain why I think the sell-off has been significantly overdone.
What's going wrong?
The key factor is a downturn in retail conditions and a drop in sales.
Strong inflation and increased interest rates may be causing shoppers to reduce their spending, particularly on categories like furniture and homewares.
In the first seven weeks of FY24, Adairs said in its trading update that group sales were down 8.9% year over year, Adairs brand sales were down 8.5%, Mocka sales were down 5.2% and Focus sales were down 10.9%.
When Adairs announced its outlook commentary with the FY23 result, it said that "the near-term outlook is likely to remain challenging given prevailing macro-economic headwinds."
The S&P/ASX 300 Index (ASX: XKO) share has implemented "material cost reduction initiatives". Adairs' board "remains confident that the group is well-placed to navigate these challenges given its resilient omni-channel business model, loyal customer base, large addressable market and proven management team."
The latest we've heard from the retail sector doesn't make for great reading. According to reporting by the Australian Financial Review, the National Australia Bank Ltd (ASX: NAB) business survey revealed that retailers reported a large decline in forward orders over the past year, which may be partly what's weighing on the Adairs share price. In August this survey's reading was a negative 23 index points.
That implies that the number of retailers reporting a decline in customer forward order growth outweighed retailers reporting growth, by 23 percentage points.
According to the survey, the worst parts of the decline related to car retailers (negative 43 index points) and personal and household goods retailers (negative 17 index points).
Why I think the Adairs share price is an opportunity
The ASX 300 share is clearly suffering and may continue to report a sales decline during FY24. The market is seemingly expecting that.
When it comes to retail conditions for a discretionary retailer, it makes sense that there will be changes in levels of demand – the economy and households see ups and downs.
Adairs clearly isn't a miner, but I think that it's helpful to think of the retailer in a similar sense as the cycles that ASX mining shares like BHP Group Ltd (ASX: BHP) see. There are boom times and weak times, and it's the periods of decline that can make an opportunistic time to invest before conditions (hopefully) recover.
For me, it seems like the market is pricing the business as though poor retail conditions will last for a very long time (or forever). I'm not expecting a sales turnaround in the next several months but remember – good investing is a long-term activity. In my opinion, this opportunity is about recognising that the current conditions are weak, and the outlook is weak, with uncertainty about when the recovery will be. These are the sorts of circumstances I see that usually create the best value-buying opportunities.
A three-year timeframe would be good to keep in mind – it won't be a quick fix.
The estimates on Commsec suggest that the earnings per share (EPS) could bounce back to 22.9 cents in FY25, which would put the Adairs share price at under 6 times FY25's estimated earnings. If earnings and sales are growing in FY25, it could be easy to justify a price/earnings (P/E) ratio of at least 8.
Time will tell how long it will take for a sales recovery, but I think the Adairs share price is a great opportunity to invest in the ASX 300 share.
