Shares in online clothing giant ASOS (LSE: ASC) jumped 10% early this morning on news that recent trading has been far better than investors had been predicting. When you consider how brutal 2020 has been for most retailers, that’s really quite something.
Is there still time for new investors to load up on this one-time penny stock and make money? Here’s my take.
ASOS: beating expectations
Despite being confined to their homes for a significant proportion of the year so far, it seems many of ASOS’s customers were still looking for their fast fashion fix.
This morning, the AIM-listed business revealed that revenue growth for its full financial year (which ends on August 31) is now likely to be between 17% and 19%. It went on to say that pre-tax profit for FY20 would now be somewhere between £130m-£150m.
Considering how awful 2020 has been so far, numbers such as these are great on their own. However, it isn’t just the amount of clothes ASOS has been shifting that surprised the market.
Far from buying a huge bunch of threads they don’t really intend to keep, it would appear that customers are making a lot more “deliberate” purchases. In other words, they are sending less back to the company. This is the opposite of what ASOS was expecting once lockdown restrictions were reduced. Indeed, it stated that it had seen “a significant and sustained reduction in returns rates since April”.
For a company that has been forced to investigate and shut down accounts that show an “unusual pattern” of buying and returning clothes in the past, this is clearly very welcome news.
Cautious outlook
As good as today’s update is for holders, ASOS’s management isn’t getting carried away just yet.
Like many listed businesses relying on discretionary spending, it highlighted that the “consumer and economic outlook remains uncertain“. There’s simply no way of knowing how long this “favourable shopping behaviour” will carry on for.
Considering it’s just been confirmed that the UK is now in recession for the first time in 11 years, this all seems very reasonable. After all, a rise in unemployment translates to increased belt-tightening among ASOS’s target demographic.
What’s more, the possibility of a significant second coronavirus wave — and subsequent lockdowns — is still very real. Should this happen, I suspect those forced to work from home now have all the clothes they need.
High valuation
At just over the 4,500p mark, ASOS’s share price hasn’t been this high since December 2018. That said, it’s still far off the high of around 7,600p seen about two-and-a-half years ago.
If it can achieve its goal of becoming “one of the few truly global leaders in fashion retail“, there’s a possibility it might one day return to this level.
There is, however, a problem. In my view, many of ASOS’s qualities — a great brand, solid finances, decent earnings diversification — look to be already priced in.
Before this morning’s action, the stock changed hands on an eye-watering forecast price-to-earnings (P/E) ratio of 87! That’s already a mighty price to pay for any stock, even one that’s now beating expectations.
As an investor, I get nervous when nothing but perfection is expected from a company.
The time to buy ASOS was back in March. So, if we get another market crash, you’ll know what to do.
