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Are ASOS shares a screaming buy at 2,700p?

A stack of ASOS delivery bags
Image: Royston Wild

ASOS (LSE:ASC) has been in the news a lot recently, following the latest results along with news regarding the CEO. ASOS shares are down 31% over the past three months, which has compounded the 12-month return. Over the past year, shares are now down 46%. So from levels of 5,700p+ in April, does the current share price of 2,700p make it an undervalued bargain?

The recent moves explained

Final results for the year ending 31 August came out last month. On the face of it there was lots to be positive about. Sales grew by 22% versus the previous year. When you exclude the costs of the Topshop brand acquisition and integration, adjusted profit before tax grew to £193.6m from £142.1m the year before.

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However, ASOS shares tumbled from the report due to the outlook going forward. Profit before tax is only expected to be in the region of £110m-£140m. The reasons behind this were numerous. It stated “notable cost headwinds including incremental inbound freight costs, Brexit duty annualisation, outbound delivery costs and labour cost inflation”. It also noted the removal of the £67.3m COVID-19 related benefit from the government.

As a result, ASOS shares dropped over 10% when the results came out. 

The other factor causing the share price to dip is the departure of the CEO. Nick Beighton served for six years at the company, but his departure was with immediate effect. The search for his permanent replacement has already begun. When any CEO leaves a company after a successful stint in the position, it’s never really seen as a positive. So this news also hurt ASOS shares.

Do ASOS shares offer good value?

Adding up the below points, ASOS shares trade down at 2,700p. This is only slightly above the lows of the year, that were posted earlier in October. It has a price-to-earnings ratio of 22, which is low for the sector. However, it’s above average when I consider that the FTSE All Share average P/E ratio is around 15.

Therefore, if I want to buy into the fashion sector, I think ASOS shares would be a good option. However, if I don’t think that this area has a positive outlook, I’d stay away.

Personally, I think that supply chain issues and a potential fragmented holiday season due to Covid-19 could pose problems for the industry. I don’t want to appear a pessimist but this winter could be a tough one for the UK. ASOS does operate in many other markets apart from the UK, so it could be well placed to weather this storm. Further, the online presence could benefit the company if we’re advised to stay at home for some period.

Ultimately, with ASOS noting headwinds going into the next financial year, I think I can find better investment options outside of fashion. ASOS shares are a buy if I want to get exposure to the sector, but currently I’m not keen.

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jonathansmith1 has no position in any share 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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