With the Reserve Bank of Australia (RBA) expected to deliver a rate cut this month, consumer discretionary stocks are likely to get a boost.
Homeware retailers could be among the biggest beneficiaries. Homeware is considered a discretionary item, which consumers purchase when they have spare cash in their pockets.
Therefore, shares like Adairs Ltd (ASX: ADH) and Temple & Webster Group Ltd (ASX: TPW) could benefit from rate cuts.
But, which is the better investment right now?
Adairs (ASX: ADH)
Adairs is Australasia's leading omnichannel retailer of homeware, furniture, and home decor. It has a strong presence of more than 190 physical stores and a growing online presence. Adairs operates through its three main brands: Adairs, Focus on Furniture (Focus), and Mocka. In its most recent result, group sales grew 6.6% to $311 million, with its Adairs brand generating record sales growth of 9.3% despite a tough consumer environment.
Its current valuation is particularly compelling, trading at a price-to-earnings (P/E) ratio of just 13.39 times. It also offers an attractive dividend yield of 5.40%, which is above every big 4 bank except ANZ Group Holdings (ASX: ANZ).
Adairs shares have an enviable track record, having risen 53% over the past five years and 17% over the past year. Despite its impressive run, Adairs' market capitalisation sits at less than $500 million, providing scope for it to grow into a much bigger company.
With consumer discretionary companies such as Adairs expected to benefit from interest rate cuts, this could be an opportune time for ASX investors to add this retailer to their portfolio.
Temple & Webster (ASX: TPW)
An alternative homeware retailer to consider is Temple & Webster. In contrast to Adairs, Temple & Webster operates online only, with no physical store presence. It seeks to capitalise on the growth in e-commerce. In 2024, more than 17 million Australians shopped online, marking a 45% increase from 2020, according to Red Research. Further rate cuts could see these numbers surge even further. Temple & Webster is growing at a significantly faster rate than Adairs, recently reporting half-year revenue growth of 24% to $313.7 million.
Temple & Webster has an even better five-year track record than Adairs, having risen 368% over that time frame. Its shares are also up 40% over the past 12 months. Given that it only recently became profitable, its P/E ratio stands at 329.63, and it does not pay a dividend. Those after a faster-growing (yet more expensive) homeware retailer might be more interested in Temple & Webster.
Foolish Takeaway
Adairs and Temple & Webster could be positioned to excel should the RBA deliver further rate cuts. While both companies have strong attributes, the better investment is likely to come down to personal preference. Those after a slower-growing, less expensive, dividend-paying stock are more likely to prefer Adairs. For those after higher growth and willing to forgo a dividend payment, Temple & Webster is likely to be the better choice.
