Why Shares In ASOS plc Plummeted

ASOS plc (LON: ASC) is increasing capital expenditure to support future growth, but this is at the expense of short term earnings.

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Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: Shares in Asos (LSE: ASC) plunged by 18% to 5,188p during early trade this morning, after the online fashion retailer announced it will invest over £68m in capital expenditure this year, whereas previous guidance was £55m.

So what: Asos claims that this investment will increase its sales capacity to £2.5bn yearly, with expenditure going toward warehousing in the UK and Germany, and on IT.

boohoo 2The company’s international expansion has occurred at a breakneck pace, with Asos reporting a 57% increase in EU sales in the two months to 28 February. Asos is launching in China, and this investment along with the others mentioned will crimp the earnings margin to 6.5%, with costs weighing heaviest in the first half of the year.

The chief executive, Nick Robertson, commented:

“It has been an exceptionally busy period of activity at ASOS, with continued growth and accelerated investment, as we continue to build “The Number 1 Online Fashion Destination for 20 Somethings Globally.”

What we have is a plan for long-term growth at the expense of short-term profits.

Now what: Shares in Asos trade at a massive 82 times forecast earnings and there is no dividend. Since Asos listed on the stock exchange, its shares have risen 1,382%

Another retailer, Boohoo.com (LSE: BOO), made its stock market debut last Friday. Initially, the shares surged up to 60% above its listing price, but have since fallen back a bit, and are trading 12% cheaper this morning.

For Boohoo, this perhaps isn’t the worst thing, as rapid growth can raise concerns about overvaluation — and any hint of a slowdown makes that valuation look precarious. Asos, of course, is the best example of this.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark does not own shares in any company mentioned.

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