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The ASOS share price jumps on ESG strategy. Should I buy now?

A stack of ASOS delivery bags
Image: Royston Wild

It’s been a rough year for the ASOS (LSE:ASC) share price. While the stock started 2021 strongly, it didn’t last. And consequently, it’s now trading around 36% lower than 12 months ago. But last week, the company unveiled a new ESG strategy that triggered a notable bump in the ASOS share price. What does this mean for the business over the long term? And is it primed to make a comeback? Let’s take a look.

The falling ASOS share price

Unlike most retail businesses, ASOS thrived throughout 2020. In fact, between March and December, the share price surged by over 350%. With lockdown restrictions forcing most clothing retailers to close their doors, this group’s online-only business model enabled it to push revenues and profits to new all-time highs.

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But as we’ve seen this year, the upward momentum didn’t endure. With the vaccine rollout making significant progress, non-essential stores have now reopened. As a consequence, consumers are no longer restricted to buying clothes online. Looking at the trading update released in July, ASOS had already seen its sales growth start to slow. And investors were less than pleased, resulting in the underwhelming performance of ASOS share price.

The ASOS share price has its risks

A renewed ESG plan

Despite the slowing growth, the stock did rise last week after management released its new ESG plan for the next eight years. The company intends to reduce its carbon emissions from direct operations to zero by 2025 and eliminate them across its entire supply chain by 2030. Meanwhile, it wants to transition all of its products and packaging to utilise only recyclable materials before the end of the decade.

It’s also pushing for greater diversity among its employees and management. And intends to publish a detailed human rights strategy report every year from 2023 to increase the transparency of its operations and that of its third-party brands.

Needless to say, this sounds like a good idea. So, I can see why ESG investors are excited, leading to the recent boost in the ASOS share price. Personally, I remain sceptical. From my experience, the term ESG has become a bit of buzz word that many companies fail to deliver on. After all, it wasn’t long ago that rival firm Boohoo was proclaiming its efforts towards sustainability before being accused of poor working practices in its supply chain.

The bottom line

As an individual, the plan outlined in the new strategy is admirable. But as an investor, until I see active results and progress being made, this latest report has little influence on my opinion about the future of the ASOS share price.

Having said that, the last time I looked at this business, I decided that it looked promising, but the price tag was too high. In retrospect, that was a wise conclusion. Today the stock is priced at a P/E ratio of around 18. That certainly seems far more reasonable in my mind, even with the recent slowdown in sales. Therefore, despite my scepticism, I am considering adding this business to my portfolio.

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Zaven Boyrazian 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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