The ASX small-cap stock Adairs Ltd (ASX: ADH) appears to be a compelling buying opportunity to me, having dropped almost 30% from its September 2025 peak.
It's close to its 52-week low, and I think that makes this a good time to invest in the discretionary retailer.
The business may be best known for its Adairs business, but it also owns Mocka and Focus on Furniture. It sells furniture and homewares.
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Slowing sales
The ASX small-cap stock recently provided a trading update, which noted slowing sales growth in the first half of FY26 to date.
Adairs' sales growth has moderated as the company pulled back on the frequency and intensity of its promotional activity.
After an encouraging start, sales at Focus on Furniture slowed despite ongoing promotional activity, leading to a lower-than-planned gross profit margin.
However, Mocka's strong sales momentum has been maintained with customers continuing to respond well to new products.
The next two months are vital for the company's overall first-half performance, with Black Friday, Christmas, and other trading events.
Adairs reduced its HY26 sales guidance from a range of $324.5 million to $336.5 million, down to between $319.5 million to $331.5 million. The gross profit margin guidance has been narrowed to between 59% to 59.5%, changed from 58.8% to 59.6%.
Management of the small-cap stock did say that they are cautiously optimistic about the trading outlook for the rest of the half. All three businesses are "well stocked".
Why this is a good time to invest in the ASX small-cap stock
It was a disappointing update; there's a reason why the Adairs share price has fallen so far in the last couple of months. But, I think the valuation takes into account the negativity and leaves room for contrarian investors to benefit from a potential rebound.
Adairs is working on a number of initiatives to improve profitability.
In the Adairs business, it wants to reduce its item count by 10%, maximise key event periods, enhance the Linen Lover membership, enable sustainable sales and margin growth (and reduce excess inventory), launch its next generation of 'store of the future', and upgrade its data and technology.
With Focus on Furniture, it wants to improve product quality and stock availability, expand product choice (including fabrics and colours), be faster to market, improve in-store merchandising, accelerate store upgrades, and open more stores.
With the Mocka business, the ASX small-cap stock aims to invest in marketing, expand its range further, and deliver a Mocka standalone store strategy.
After the valuation decline, it's now trading at around 10x FY26's estimated earnings, according to the forecast on Commsec.
