Why I think this ASX small-cap stock is a bargain at 96 cents

Recently, the ASX small-cap stock Accent Group Ltd (ASX: AX1) has experienced one of the toughest falls on the ASX. It's down around 60% in the past year, as the chart below shows.

The footwear ASX retail share has disappointed investors a number of times in the past 12 months after delivering weak trading updates.

In November, the company's trading update was again not quite as strong as hoped.

With such a volatile and cyclical industry like discretionary retail, I think this could be a good time to invest amid retail pain and no recovery in retail trading conditions in sight – that's partly why the Accent share price has fallen so far.  

The business is nearing the depths of how much it fell during the COVID-19 crash in 2020, so at this valuation I think it's attractively opportunistic to consider the business for a couple of key reasons.

Cheap valuation

Firstly, on valuation grounds.

It certainly seems true that the ASX small-cap stock's near-term earnings are going to be weaker than investors were expecting a year ago. But, are long-term earnings likely to be 60% lower forever (based on the share price decline)? I doubt it.

FY26's earnings may be disappointing, but FY27 or FY28 earnings could positively surprise in the same way that FY26 earnings have suddenly negatively surprised the market. At this lower valuation, I think investors have a good margin of safety for the long-term.

For now, analysts are expecting a large rise of earnings per share (EPS) in FY27. For example, the projection from UBS suggests a possible EPS rise of 28% and the EPS forecast on CMC Markets suggests a rise of 35%.

UBS' longer-term projections suggest EPS could climb to 11 cents in FY28, 13 cents in FY29 and 15 cents in FY30.

Five years is a long time in the retail world, but I think a recovering net profit could help give confidence again.

While UBS was unimpressed by the recent update, it still thinks the company's costs and margins can improve in the longer-term.

Sports Direct Australia

Secondly, the growing potential growing influence of Sports Direct Australia.

Accent is seeing mixed performance within its business, with some brands performing (such as The Athlete's Foot and Hoka), and some not (such as Platypus, Vans and Skechers).

In the coming years, Sports Direct Australia could be the key to whether the ASX small-cap stock recovers to former share price heights or not.

This business is Accent's partnership with Frasers to open dozens of large sports stores across the local market. Not only can Sports Direct Australia sell Accent brands, but it can also sell Frasers brands (like Lonsdale, Everlast, Karrimor, Hot Tuna and more) and key global brands like Nike, Adidas, New Balance, ASICS, New Balance, Under Armour and Puma.

The ASX small-cap stock is planning to have at least three stores open in FY26 and at least 50 stores over the next six years. This initiative could be a gamechanger.

This expansion will mean incurring various costs as it establishes Sports Direct Australia ahead of the sales generation, so investors will need to be patient.

I think long-term investors could be well-rewarded if they buy Accent shares at this level, but there could be plenty of volatility over the next year or two.

The post Why I think this ASX small-cap stock is a bargain at 96 cents appeared first on The Motley Fool Australia.

Motley Fool contributor Tristan Harrison has positions in Accent Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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