2 ASX Penny Stocks That Could Benefit from Rate Cuts

As Australia edges closer to potential interest rate cuts, investor sentiment is shifting. The Reserve Bank of Australia (RBA) has hinted that monetary policy could soon ease as inflation cools and economic growth slows. That means businesses sensitive to consumer spending — especially smaller retailers — might finally get a tailwind after a tough few years.

Among ASX’s small-cap universe, two retailers stand out as prime beneficiaries if rates start to fall: Baby Bunting Group Ltd (ASX: BBN) and Adairs Ltd (ASX: ADH). Both companies cater to everyday household spending and are closely tied to consumer confidence. Let’s explore why these two “penny” stocks could shine in a lower-rate environment.

1. Baby Bunting Group Ltd (ASX: BBN)

When Parents Spend, the Economy Smiles

What the company does:
Baby Bunting is Australia’s leading specialty retailer for maternity and baby goods — a trusted one-stop shop for new and expecting parents. Its stores sell everything from prams and car seats to feeding products, toys, and nursery furniture. With around 70 stores across Australia and a growing online presence, it has become a household name for parents nationwide.

Latest financials (FY2025):

1. Revenue: Approximately $521.9 million
2. Net Profit: Around $9.5 million
3. Underlying EBITDA: Roughly $42.6 million
4. Gross Margin: Around 37%

Why it could benefit from rate cuts:

1. Improved household budgets:
   Lower interest rates reduce mortgage and loan repayments, freeing up cash for families. Baby Bunting’s core customers — new parents often juggling mortgages — would likely redirect that extra money toward essential baby products.
2. Life-stage resilience:
   Unlike purely discretionary retailers, Baby Bunting sells “need-based” goods. Parents can postpone some purchases, but essentials like car seats, nappies, or feeding gear are unavoidable. When financial stress eases, spending tends to rebound quickly in this segment.
3. Brand loyalty and national scale:
   With a strong brand reputation, Baby Bunting is well positioned to capture market share from smaller retailers and online competitors. Its omnichannel model — a mix of physical stores and e-commerce — also provides a steady growth platform.

Risks to watch:

1. Margin pressure: Wage growth and higher rent costs could continue to strain profitability.
2. Competition: Online marketplaces like Amazon and discount chains can squeeze pricing power..

Bottom line:
Baby Bunting’s resilience in a challenging retail environment makes it an appealing defensive play. A rate cut cycle could unlock fresh demand among its core demographic — young families — while improving sentiment toward consumer-facing small caps. With solid cash generation and loyal customers, Baby Bunting could quietly outperform if economic conditions turn supportive.

2. Adairs Ltd (ASX: ADH)

Home Comforts Could Get a Reboot

What the company does:
Adairs is a well-known home furnishings and décor retailer with operations across Australia and New Zealand. Its brands — Adairs, Mocka, and Focus on Furniture — cover a wide spectrum of the home goods market, from affordable décor to stylish mid-range furniture. This multi-brand approach helps the company appeal to a diverse set of consumers.

Latest financials (FY2025):

1. Revenue: Around $618.1 million
2. Net Profit Margin: Approximately 4.1%
3. EBITDA: Around $72 million
4. Dividend: Fully franked payout of 10 cents per share, reflecting a yield of roughly 6%

Why it could benefit from rate cuts:

1. Revival in home spending:
   Lower borrowing costs often translate into a “wealth effect.” Homeowners feel more confident about their finances and tend to spend more on home improvement, décor, and furniture — all of which directly benefit Adairs.
2. Stronger consumer sentiment:
   Rate cuts can lift overall confidence, reversing the cautious spending trends seen during periods of high mortgage stress. For Adairs, even a modest rebound in discretionary spending could drive meaningful revenue growth.
3. Housing turnover boost:
   Falling rates could rejuvenate housing market activity. When more people buy or sell homes, demand for furnishings, bedding, and furniture rises — categories where Adairs dominates.

Risks to watch:

1. Profit volatility: Adairs has seen profit swings in recent years, reflecting its sensitivity to consumer trends.
2. Competition: Global chains and online rivals like IKEA and Temple & Webster continue to apply pricing pressure.
3. Operational costs: Elevated freight and material expenses could weigh on margins if sales recovery is slow.

Bottom line:
Adairs is a classic cyclical recovery story. After a challenging FY2024 marked by weaker sales and cost pressures, a shift toward rate cuts could restore profitability. Its strong brand recognition, omnichannel strategy, and exposure to home improvement trends make it a potential winner in a lower-rate landscape.

Final Takeaway: Rate Cuts Could Breathe New Life into These Penny Retailers

The RBA’s next moves could redefine the retail landscape. When borrowing costs drop, consumers tend to loosen their wallets — especially in necessity and lifestyle-driven categories.

Here’s the quick summary:

1. Baby Bunting (BBN): Offers defensive growth, selling essential baby and maternity products. It stands to gain as household budgets ease and parents spend more confidently.
2. Adairs (ADH): Represents cyclical upside, tied closely to home spending and consumer sentiment. Lower mortgage stress could directly lift its sales and margins.

If interest rates fall in 2025 as economists expect, both stocks could enjoy a meaningful re-rating. Baby Bunting provides stability and necessity-driven resilience, while Adairs offers higher-risk, higher-reward exposure to improving consumer confidence.

For investors looking to capture early opportunities in the ASX small-cap space, these two retailers deserve a spot on the watchlist. Rate cuts may not just bring relief to households — they could also awaken some of the market’s most overlooked retail names.

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