The Adairs Ltd (ASX: ADH) share price is down over 40% in the past year and it has sunk 65% from its peak in April 2021. This could be the right time to invest in the ASX dividend stock with a possible large payout and the prospect of potential capital gains.
Adairs operates three different businesses – Adairs, Mocka and Focus on Furniture.
Many ASX retail shares have quite cyclical earnings because of the way the economy can go through strength and weakness. Sometimes households don't have as much money to spend and that is materially hurting demand and sales.
The ASX dividend stock hasn't exactly seen its sales sink, but a decline can lead to a huge loss of investor confidence.
Weak FY24 expected
At the company's AGM, it said group sales in the first 21 weeks of FY24 were down 9%. It said the impact of higher interest rates and the cost of living pressures has seen a "significant" decline in traffic across each business of around 10%.
It also said the outlook for the rest of FY24 is expected to remain "challenging" because of the economic headwinds.
With this in mind, it's understandable that the Adairs share price has fallen. But, investing should be a long-term endeavour and what happens in one year won't decide its long-term performance. It could be a good contrarian opportunity now with a possible economic rebound not too far away.
The current estimate on Commsec is that the ASX dividend stock may generate earnings per share (EPS) of 16.2 cents.
The potential recovery
I'm not banking on interest rate cuts starting this year, nor do I think they're going to go down to 2% in rapid succession. But, I do think the impending start of cuts could spur an earnings recovery and perhaps excite investors about the Adairs share price.
On Commsec, the forecast suggests Adairs' EPS could rise 36% in FY25 and then go up another 25% to 27.5 cents per share in FY26. That would put the company at 7.5 times FY25's estimated earnings and 6 times FY26's estimated earnings.
No one should focus too much on the specific forecast numbers for the ASX dividend stock, the actual numbers could be better or worse than the predictions.
But, I'd point out that, generally, central banks won't want to be restrictive forever and recent wage inflation may help household spending in the future when finances aren't as tight.
I think FY19 was a good example of weakness and then subsequent recovery in performance, though history won't necessarily repeat itself.
When the company emerges from this period, it could be much more profitable than before.
Adairs is working on a number of initiatives to grow profit such as opening larger stores that are more profitable and it can showcase more of its products. It's also planning to keep opening new stores, with plans for a national rollout of Focus on Furniture stores. There's also the possibility that Adairs' (paying) membership numbers and online sales could keep growing over time.
Costs have increased during this inflationary period, but Adairs has recently taken control (from DHL) of its national distribution centre which could make a material difference in the medium-term to margins and operational efficiency.
ASX dividend stock forecast payouts
In FY24, the Adairs dividend may only be 4.3 cents per share (according to Commsec) amid these difficult economic circumstances. It's possible it may not even pay a dividend.
But, in FY25 Adairs is forecast to pay an annual dividend per share of 14.5 cents if earnings rebound as predicted. That would be a grossed-up dividend yield of 12.5%.
FY26 could see the business pay an annual dividend per share of 19.4 cents, which would be a grossed-up dividend yield of 16.8%.
The short-term outlook is weak, but that's why we're being presented with a more attractive Adairs share price today, which could mean big dividend yields in the future.
