Down 90% in 5 years, can the ASOS share price get much lower?

The ASOS share price has crashed 90% since April 2019 resulting in long-term investors nursing heavy losses. I wonder if things will soon get better?

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They say a picture paints a thousand words. This is certainly true when it comes to the five-year ASOS (LSE:ASC) share price chart.

With the pandemic forcing people to stay at home, the company benefited from a boom in online clothes shopping. And as disposable incomes started to fall, consumers became even more price-conscious and loved the company’s affordable pricing.

But then its margins were squeezed by post-Covid inflation. And in the face of intense competition from cheaper retailers, it was left with loads of stock that nobody wanted to buy.

The end result is a share price that’s currently 90% lower than it was in April 2019.

Can things only get better?

But the first step to recovery is to admit that you have a problem.

And the company’s directors have done just that. They have implemented a turnaround plan that intends to restore inventories and margins to their pre-pandemic levels. Their focus is on improving profitability rather than growing the top line.

However, opinion appears divided as to whether the company (and its share price) will be able to recapture former glories.

ASOS stock is currently the second most shorted with investors borrowing 6.39% of its shares in the hope that they fall in value. In contrast, Mike Ashley appears to be more optimistic, with Frasers Group now owning 27.1%.

Personally, I think the company will turn the corner in 2024. And I remain hopeful that its share price will start to recover.

During its last financial year — which ended on 3 September 2023 (FY23) — it recorded adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of £125m.

Although analysts are expecting this to fall in FY24 to £86m, for the next two years they’re forecasting £158m (FY25) and £204m (FY26).

However, that doesn’t mean I want to invest. Even with EBITDA of £204m, the company is unlikely to break even at pre-tax level. Its FY23 finance costs, depreciation and amortisation were £206m.

Reasons to be optimistic

But the company does have lots going for it.

To capitalise on fast-moving trends, it’s currently piloting ‘Test & React’. The company hopes to get new products designed, manufactured and on sale within two weeks. That sounds like the ultimate in fast fashion to me and would surely give it a competitive edge.

Another plus is that it doesn’t charge for returns, unlike most of its rivals.

In addition, the company hopes to reduce its net debt over the course of FY24. It also expects to see an improvement in its margin and should start to reap the benefit of having less cash tied up in stock.

All these positives suggest to me that the company’s share price could start to climb.

But I don’t want to own a stake in ASOS. I can’t see how it’s going to return to previous levels of profitability. For example, in FY21 it reported earnings after tax of £128.4m.

And in November, when speaking to analysts, the company’s chief executive said: “I know you guys love numbers, but here we love fashion”. I wish he loved both.

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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