Cyclical ASX shares that have been sold off can be very compelling ASX shares to buy with a contrarian attitude. It's normal for ASX mining shares and ASX discretionary retail shares to go through a bump.
Investors have been hoping ASX retailers will quickly turnaround following the high inflationary period, but that hasn't quite happened yet in most cases.
The two ASX shares I'll discuss have both sold off recently after updates were not as positive as the market had hoped. On a medium-term basis, this could be a good time to invest.
Adairs Ltd (ASX: ADH)
The Adairs share price is down 21% in the past month, as the chart below shows.
The ASX share is a furniture and homewares company with three different businesses – Adairs, Mocka and Focus On Furniture.
In a June update, the company said the Adairs business is on track to deliver a record sales year in FY25, with revenue growth of approximately 9% year over year. However, that performance has been helped by "elevated promotional activity aimed at driving sales and managing inventory". The Australian dollar also weakened compared to the prior year. Those two factors negatively impacted the gross profit margin.
Group revenue growth is expected to be 6.1% in FY25, with Focus on Furniture revenue predicted to decline 7% and Mocka revenue forecast to increase 14.1%.
However, Adairs is expecting underlying operating profit (EBIT) growth of 1.2%.
There are a number of positives to take from the update for the medium-term.
First, the Adairs national distribution centre (NDC) continues to see service and cost metrics improve.
Second, new and refurbished Focus on Furniture sales are outperforming others in the portfolio. The national store roll-out will continue.
Third, Mocka Australia is performing well (with 25% revenue growth in FY25) and it's trialling Mocka with physical stores.
I think the ASX share's earnings can bounce in FY26 following multiple RBA rate cuts if consumers return to the shops (and websites) in greater numbers.
Accent Group Ltd (ASX: AX1)
The Accent share price has dropped 22% in the past month, as the chart below shows.
Accent is a major shoe retailer in Australia, with a number of its own businesses including The Athlete's Foot, Stylerunner, Platypus and several others. It also acts as a local distributor for numerous global brands including Skechers, Ugg, Vans, Hoka, Herschel and Saucony.
In a June update, the business reported that trading conditions continued to be challenging in the second half of FY25, with low overall growth in the lifestyle footwear market from March to early June, impacting sales in both the retail and wholesale segments.
Accent said the promotional environment and a focus on managing inventory levels is pressuring its gross profit margin. Accent said its gross profit margin in the second half to date had dropped 80 basis points year-over-year. Operating profit (EBIT) for FY25 is expected to be between $108 million to $111 million.
Like Adairs, this isn't what shareholders want to see. But, I believe it's just a shorter-term problem because both company-specific and wider economic factors could help profit growth.
Firstly, I think multiple RBA rate cuts could help improve consumer confidence (and finances).
Second, Accent continues to roll-out stores which should help sales growth and support profit margins through scale benefits.
Third, the ASX share has going to work with Fraser's to open dozens of Sports Direct stores in Australia and New Zealand and also bring its portfolio of brands to Sports Direct and other Accent Stores, including Everlast, Lonsdale, Slazenger, Karrimor, USA Pro and Hot Tuna.
Overall, I think earnings can recover in FY26 and beyond.
