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ASOS shares just tanked. Here’s my move now

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A stack of ASOS delivery bags
Image: Royston Wild

Shares in online fashion retailer ASOS (LSE: ASC) have had a bad run. Yesterday, the stock fell 13% after the company posted its full-year results for the year ended 31 August. Over a year, the share price is down more than 50%.

This share price performance is very disappointing for ASOS investors, myself included. No one likes to see their investments blow up like this. So what’s the best move now? Should I sell my ASOS shares, hold onto them, or buy more?

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ASOS: full-year results

Yesterday’s results did contain some positives, to my mind. Full-year revenue, for example, was up a healthy 22% on a constant-currency basis to £3.9bn. Most retailers would kill for that kind of top-line growth.

Another highlight was the growth in the active customer base. This was up 13% year-on-year to 26.4m shoppers.

These figures suggest to me that the company’s still heading in the right direction.

Why the ASOS share price crashed

There were definitely some negatives in the report though. For example, gross margin for the year was down 2% to 45.4%, driven by elevated freight and brexit-related duty costs, product mix, FX headwinds, and increased customer investment.

ASOS said it expects the supply chain pressures to continue throughout the first half of this financial year. This means longer lead times and constrained supply from a number of its partner brands.

Another negative was the short-term revenue outlook. H1 revenue is only projected to be up mid-single digits, due to tough comparables in the first half of the year. Meanwhile, pre-tax profit for the year ahead is expected to be well below analysts’ forecasts.

On top of all this, the company announced that CEO Nick Beighton is set to step down. Right now, it doesn’t have a replacement lined up. This is certainly not ideal.

Overall, it’s not hard to see why the ASOS share price tanked yesterday.

Short-term challenges

Looking at these results and the outlook, it’s clear to see that ASOS faces some challenges right now.

However, the thing is that most companies in the industry are facing very similar challenges. After a huge year for e-commerce last year, revenue growth across the sector is underwhelming, due to tough comparables.

Meanwhile, supply chain challenges and higher costs are hitting profits across the industry. We’ve seen the same trends at a number of major clothing companies recently, including Nike and Boohoo.

To my mind, these are most likely short-term issues. Over time, we should see revenue growth normalise and supply chain challenges and higher costs subside.

My move now

So, what am I going to do with my ASOS shares? I’m going to hold onto them and I may buy some more.

Ultimately, I still like the company. I think it offers a great service and I expect it to recover from the short-term setbacks it’s experiencing now. I think the growth story here is still intact. After all, revenue is up 63% in just three years. Looking ahead, ASOS is targeting annual revenues of £7bn.

Of course, there are a few risks to keep an eye on. Supply chain challenges could persist for longer than anticipated. Competitors could steal market share. The lack of a CEO adds uncertainty.

Overall however, I think ASOS shares offer an attractive long-term risk/reward proposition right now.

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Edward Sheldon owns shares of ASOS and boohoo group. The Motley Fool UK owns shares of and has recommended Nike. The Motley Fool UK has recommended ASOS and boohoo group. 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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