Is the falling ASOS share price NOW a bargain?

The ASOS share price has dropped again as investors fret over soaring inflation. Should I go against the herd and buy the battered UK share today?

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The ASOS (LSE: ASC) share price has taken a pasting over the past 12 months. And it has continued to fall on Wednesday following a chilly reception to latest trading numbers.

ASOS’ share price has tanked 72% since this point in 2021. Prices have been volatile over the last 24 hours following yesterday’s interim results release. But selling activity has heated up again today.

Does this fresh weakness provide another great dip-buying opportunity for me? Or should I avoid ASOS shares like the plague?

A quick recap

ASOS’ half-year update on Tuesday offered up some goodies as well as some nasties. On the positive end of the scale, ASOS said revenues were up 4% at constant currencies in the 12 months to February 2022. This was despite the impact of supply chain issues and stock availability problems.

ASOS also saw its customer base continue to grow. It had 26.7m active shoppers on its books as of February, up 300,000 from six months before.

Now for the bad news

ASOS’s update shows that sales growth has, as expected, slowed considerably over the past year. Turnover leapt during the pandemic as Covid-19 lockdowns shuttered physical clothing retailers and forced people online. As a consequence adjusted pre-tax profits crashed 87% year-on-year to £14.8m.

Significant cost inflation (and in particular increased staff and freight costs) is what’s really spooking investors today. Gross margins at ASOS slumped 190 basis year-on-year to 43.1% as of February as the retailer was also forced to increase clearance sales.

Gathering clouds

The worry for ASOS is that these inflationary pressures seem to be worsening (ONS data today showed consumer price inflation in the UK hit new multi-decade highs of 7% in March).

Indeed, it yesterday warned that the external environment has become “more challenging” during the past six months. It also said “the full impact of recent inflationary pressure on consumers and the potential impact on discretionary spend are yet to be felt.” This creates more risk for the second half than usual, ASOS noted.

Reasons to be cheerful?

So should I buy ASOS shares today? Well there are some reasons to be optimistic for the online shopping giant.

Hargreaves Lansdown analyst Matt Britzman, for example, notes that “the acquisition of Topshop looks to be a real asset and there are signs that the group’s push outside the UK has potential if supply chains and stock levels can keep up with demand.”

Topshop sales rocketed 193% in the first half, thanks to strong sales in Britain, the US and Germany.

However, for me, these opportunities don’t quite offset the risks. In the short term, those inflationary pressures threaten to decimate shopper demand and keep costs rising sharply.

And over the longer term, ASOS will have a fight on its hands to win business. The mid-tier clothing market is already ultra competitive, and retailers continue investing heavily in e-commerce to chip away at ASOS’ market share.

Today, ASOS’s share price commands a forward P/E ratio of 20 times. This isn’t low enough to encourage me to buy the e-retailer today. I’d rather buy other UK shares to capitalise on the digital revolution.

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 assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and Hargreaves Lansdown. 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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