The ASX stock Adairs Ltd (ASX: ADH) has seen a strong bounce in its share price. It's up 16% in 10 days, but I still believe it's undervalued.
Interestingly, if we look at the chart below, we can see that the Adairs share price is close to where it was in December 2019 – just before COVID.
I'm not expecting the Adairs share price to go above $4 any time soon, however I think it's still a medium-term cyclical opportunity.
ASX mining shares often go through cycles as the commodity price changes. I believe ASX discretionary shares like Adairs can also be opportunities when they hit a low point.
In 2023, I regularly wrote about how I viewed Adairs as a beaten-up opportunity. But I think Adairs shares can continue rising. There are a few reasons why I'm optimistic about this ASX stock's longer-term future.
Households and Adairs sales are still struggling
If I were to utilise a multi-year investment strategy with Adairs, I'd want to buy when retail conditions were weak and sell when conditions were strong.
In the first eight weeks of FY25, Adairs reported that group sales had declined 0.4%. Looking at the different brands, Adairs sales were up 0.2%, Focus on Furniture sales were down 0.1%, and Mocka sales were down 5.2%.
The ASX stock noted that Adairs promotional activity had been reduced, but the gross profit margin had increased by more than 300 basis points (3.00%). Mocka sales were down due to a 15.7% decline in New Zealand sales, while Australian sales were up 4.6%.
Adairs noted that customers remain "discerning and value-oriented, however newness and well-designed quality products continue to resonate across the three businesses."
If/when economic conditions improve, I expect there will be a sizeable uptick in sales for the company.
Increased scale and initiatives
Adairs has invested in optimising its store network. I think those benefits will flow and become apparent as the economy normalises.
In FY25 alone, it's targeting six new Adairs stores and three new Focus on Furniture stores. In the last few years, it has upsized some of its Adairs stores, which are significantly more profitable than smaller stores, as it allows Adairs to display more of its product range.
With the FY25 result, Adairs said:
The completion of a number of major projects in FY24, such as taking control of the NDC [national distribution centre] and re-platforming Mocka's website, enables management to focus more on new growth initiatives to drive like-for-like sales and future profitability.
Some of those initiatives include expanding its product ranges and allowing the Mocka business to trial new channel opportunities, including wholesale and shop-in-shop.
Low valuation creates large dividend yield
The Adairs share price could fall in the short term, but I'm suggesting it's attractive to buy and hold until strong retail conditions occur.
The broker UBS forecasts the ASX stock could generate earnings per share (EPS) of 25 cents per share in FY26 and pay a dividend per share of 18 cents. That means that, at the current Adairs share price, it could be valued at 9.3x FY26's estimated earnings, with a projected grossed-up (including franking credits) dividend yield of 11%.
I believe it's still very attractive.
