ASOS (LSE: ASC) shares slumped by 32% on Thursday. And that steep dip takes them down 84% over the past 12 months, in a period when the FTSE 100 has blipped up by 1.4%.
It’s all about results falling short of expectations, as the clothes seller faces fresh danger from soaring inflation and rising interest rates. Inflation is tipped to break 11% this year, and that will not help the retail business. But does that make ASOS a buy for investors now, in times of such pessimism?
“Be fearful when others are greedy, and greedy when others are fearful,” urged billionaire investor Warren Buffett. And that’s become something of a mantra for contrarian investors.
Buy ASOS shares now?
But Buffett does not mean we should just buy anything after a crash. And though ASOS shareholders appear to be fearful now, I really just take it to mean it’s a great time to investigate the fundamentals and decide whether it’s a no-brainer buy after such a huge 12-month fall.
The damage came on the back of first-quarter figures. The company said: “Gross sales accelerated, however net sales were impacted by a significant increase in returns rates in the UK and Europe towards the end of the period, reflecting inflationary pressures on consumers which has a disproportionate impact on profitability.”
That does highlight a weakness in this kind of business. It’s fine selling stuff, but online retailers have to cope with potentially serious levels of returns.
Growth halted, profits hit
Pulling out of Russia in March in response to the invasion of Ukraine didn’t help. But even after excluding Russia, constant currency revenue increased only 4% in the quarter. And rest-of-world (excluding UK, EU and US) sales still dropped 8%. With Russia, the fall reached 20%.
On a reported basis, total revenue declined by half a percent.
I don’t think that’s too bad for a fashion retail company in today’s global markets. But when it’s one in the early stages of going for worldwide expansion, it can hurt.
The company has slashed its pre-tax profit outlook for the full year. Having suggested £110m-£140m as recently as January, ASOS now expects only £20m-£60m. And that’s a very wide range.
Why I’m optimistic
This all sounds super gloomy, but I see room for optimism. Yes, revenue has effectively stagnated. But it had enjoyed a couple of years of pandemic-driven boosts. Now restrictions on shopping have ended, I can see it as partly a positive that revenue has held up.
Profitability is clearly suffering this year. But ASOS bounced back strongly from a bad year in 2019. If it can get back to 2021 earnings levels, the current share price would suggest a P/E ratio of only six.
I don’t see a quick return to previous profit levels. And I expect the 2022-23 year, which will be with us in less than three months, to start off tough.
So no, I wouldn’t rate ASOS as a no-brainer buy. But if things get back to normal, I think now could turn out to be a good time for investors to buy for long-term growth prospects.