Why is the ASOS share price falling?

The ASOS share price dropped after the recent trading update. Royston Roche analyses the stock to see if it is a good buying opportunity for his portfolio.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The ASOS (LSE: ASC) share price had performed very well in the past year. However, the shares dropped 18% on Thursday after the company released its trading statement.

Here, I want to analyse the stock to understand if the drop is a buying opportunity for my portfolio.

Recent trading update

ASOS revenue growth was strong for the four months ended 30 June 2021. However, the company announced that trading in the last three weeks was more muted. Management cited the continued Covid-19 uncertainty and inclement weather as contributors to the weak market demand. I believe that this was one of the reasons for the ASOS share price drop.

Management has also been cautious on the outlook for the rest of the year due to the rising number of Covid-19 cases. The recent travel restrictions have also delayed holiday plans and have made it difficult for people to plan their wardrobe purchases. 

Total group revenue for ASOS grew by 21% to £1.3bn. It was mainly helped by strong growth in the UK, which grew 36%. The growth was also strong in the US as the region grew by 20%. The active customer base increased to 26.1m from 24.9m at the end of February 2021.

The company has recently announced a partnership with a US-based multi-channel retailer Nordstrom, which will invest in a minority interest in the company’s brands like Topshop, Topman, Miss Selfridge, and HIIT brands. In my opinion, this is positive since Nordstrom has a good presence in the North American markets. Also, previously it had sold Topshop and Topman clothes in the US when the brands were under Arcadia Group.

The ASOS share price – risks to consider

ASOS revenue growth has been extraordinary in the past. The company benefited from the pandemic since most high street retail shops were closed. This led to strong demand for online retailers. In my opinion, with the opening of retail, the demand for online retailers might cool. If the trend changes, then it could impact the ASOS share price.

Weather conditions have been very uncertain this summer in the UK. Management also mentioned in the earnings call the sudden change in the customer online searches, from summer wear to winter wear observed on their website. Also, Covid-19 cases are increasing globally. Most people are finding it difficult to plan their holidays. This might harm the company’s revenue growth.

Global supply chain disruption is another concern for the company. The increase in freight costs due to supply constraints could further strain the company’s profits. The gross margin in the recent quarter dropped 1.5% due to higher freight costs and unfavourable foreign exchange movements. This, in my opinion, is another reason for the ASOS share price to drop. 

Bottom Line

The company’s revenue has been good in the past. However, I am not convinced to buy the stock due to the current market uncertainty. I will continue to keep the stock on my watchlist for now.

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 considered so you should consider taking independent financial advice.

Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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