The ASOS share price just leapt 20%! Is the stock back in fashion?

With the ASOS share price up 20% on Thursday, James Beard looks at the reasons behind the move and considers whether he should buy the stock.

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The ASOS (LSE:ASC) share price has fallen by over 65% since the start of 2022. It’s now 90% below the all-time high, achieved in March 2018.

Latest update

But, long-suffering shareholders received a boost this week, when the company released its trading update for the last four months of 2022.

At first glance, the press release appeared a little gloomy. However, investors were impressed, and the company’s share price jumped 20% as a result.

ASOS disclosed that sales were down 6% compared to the same period in 2021. International sales (those outside the UK, Europe and US) fell by 31%.

Active customers — defined as those that have purchased something during the past 12 months — remained broadly unchanged at 25.5m. Worryingly, the cash outflow for 2022 is expected to be up to £100m.

This is all a far cry from 2021, when the company made a profit before tax of £177m.

Better news?

However, there was some good news in the statement.

Following a loss for the first half of the year, the directors are expecting “significantly” improved profitability in the second half of 2023.

The principal reason behind this turnaround is a programme of cost savings being implemented. A combination of staff redundancies, footprint reduction, and the removal of unprofitable product lines should save the company £300m a year.

Chief Executive Officer Jose Antonio Ramos Calamonte explained that the company is moving away from prioritising top-line (sales) growth to improving profitability.

But, part of the company’s appeal is also its downfall.

The ASOS website has over 70,000 products for sale, sourced from 900 brands. If you search for a white T-shirt, you’ll be presented with dozens of items to choose from.

However, this comes at a cost.

At 31 August 2022, the company had stock of £1.1bn. This is equivalent to six months’ cost of sales. The directors are hoping to reduce stock by 5% this year. Also, there’s a danger that bad buying choices will be made. Indeed, the company will have written-off up to £130m of stock by the end of the current financial year.

What do I think?

It sounds to me as though the company is moving in the right direction.

As recently as October, there was speculation as to whether ASOS would survive. The company had to release an unscheduled statement confirming that it had successfully re-negotiated its credit facilities. Now, it has £430m available to support the transition to profitability.

Although I can see growth potential, I remain concerned that disposable incomes, particularly those of the company’s target “fashion-loving 20-somethings“, may suffer as a result of the expected economic slowdown.

I also prefer owning shares in companies that reward their shareholders. Since floating in 2001, ASOS has never paid a dividend. And, it appears unlikely to do so in the short term. The trading update implies that the cash position will remain difficult for the next year or so.

For these reasons, I’m not going to invest at the moment.

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.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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