ASOS (LSE: ASC) has struggled of late. Indeed, after soaring during the pandemic, it is down around 70% over the past year, grossly underperforming other British stocks. This poor performance has been caused by the reduced demand for online players after the reopening of the high street, as well as supply chain issues and inflationary pressures. But is the worst now over and can the ASOS share price return to its previous highs?
Recent trading update
The interim results for the first six months to 28 February 2022 were not that great for ASOS. In comparison to a £109.7m operating profit in the same period last year, the e-commerce retailer made an operating loss of £4.4m this time. This was due to the rise in costs, including investment in marketing and significant cost inflation. The Covid-related benefits that were seen last year have now unwound, which helped explain the significantly poorer results.
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Further, the company expects to take a £14m hit to its profits and a 2% reduction in growth following its decision to cease trading in Russia. Evidently, this is not good news for the company.
As such, the only slight positive that could have been taken from the results was the fact that group revenues in the period reached over £2bn, a 4% year-on-year rise. This may be one explanation why the share price rose around 6% yesterday, despite the poor results. It has fallen back 5% today, however.
There were some more positive signs for the future, though. For example, it expects sales growth will accelerate in the second half of the year, due to the return of event and holiday-led demand, and the company’s improved stock profile. I was equally encouraged to see that the company had bought more spring and summer clothes in advance, to offset the longer shipping times. This shows strong forward planning and will hopefully set ASOS apart from its competitors.
On the other hand, there were notes of caution for investors about the future. For example, the current high rate of inflation is expected to have an impact on consumer shopping habits and restrict spending. While this hasn’t been seen yet, this is still a problem to consider.
Further, it does not seem that costs are going to moderate any time soon. This may continue to strain margins, a major negative for the company. It may equally force ASOS to raise costs for consumers, a move which may see demand reduce further.
What does the future hold for this British stock?
Although the short-term future is certainly uncertain, I still believe that ASOS has long-term potential. Indeed, even though the Covid boom in e-commerce may have subsided slightly, e-tail still accounts for more retail activity than pre-pandemic. Further, ASOS trades at far lower valuations than many other British stocks, especially those classed as ‘growth stocks’. It has a price-to-sales ratio of under 0.5 and based on last year’s results, a price-to-earnings ratio of just 13. This indicates that it may be too cheap, and this why I’m tempted to snap up shares on the dip.