Why the ASOS share price spiked 9% today after H1 results

With the ASOS share price up today, this Fool is wondering whether a big turnaround might be on the cards for this small-cap stock.

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The ASOS (LSE: ASC) share price soared as high as 9% this morning (17 April) after the fast fashion group released its H1 FY24 report.

However, as I write, the gain had narrowed to 2.8%, putting the stock at 342p. Clearly, it would need a rocket launcher to get back to the 5,374p price it was trading at just three years ago.

Here, I’ll take a look at the firm’s first-half update and consider whether I’d invest in the shares.

Progress being made

ASOS is in the middle of a turnaround. This has involved cutting costs and reducing large stockpiles of unsold clothes. CEO José Antonio Ramos Calamonte said this was “the medicine we needed to take.”

And progress is being made, with the firm confirming it’s ahead of schedule in reducing stock. It’s planning more clearance sales over the final six months of the financial year (which ends in August).

For the 26 weeks to 3 March, the company’s revenue fell 18% year on year to £1.5bn while the adjusted pre-tax loss was £120m.

However, it sees a return to growth in Q4. And despite forecasting a full-year sales decline of 5%-15%, the company expects underlying earnings to be “significantly” higher, with positive adjusted EBITDA and cash generation. Next year (FY25) it expects further improvement.

Meanwhile, it named Dave Murray, a former Sainsbury’s and Amazon executive, as its new chief financial officer.

And its CEO said: “ASOS is becoming a faster and more agile business, and we are reiterating our guidance for the full year as we lay the foundations for sustainably profitable growth in full-year 2025 and beyond.”

It also committed to accelerating towards an 8% EBITDA margin in the mid-term. So the market is likely giving a bit of credit to this ongoing turnaround.

Sizeable competition

The elephant in the room here, I’d argue, is rival Shein. In fact, it’s more of an 800-pound fast fashion gorilla.

Last year, the Chinese firm reportedly doubled its profits to more than $2bn (£1.6bn) on record sales of about $45bn. That would make it more profitable than Primark and Next.

So this is formidable competition. And to compound matters, Shein is looking to go public — possibly in London — and raise billions to fund its global ambitions.

Should I consider buying ASOS shares?

As we know though, fashion trends can change very quickly. If you’d told me a few years ago that Crocs and New Balance trainers would be mass-market cool again, I’d have been sceptical.

But they are and Crocs shares are up 338% in five years.

So it’s not beyond the realms of possibility that ASOS becomes “top-of-mind for fashion” again, as the firm intends.

If management can fire up the growth engine and deliver that mid-term 8% EBITDA margin, then we could see a big turnaround in the share price. Especially from today’s valuation.

The stock is trading on a price-to-sales (P/S) ratio of just 0.11. That’s incredibly low.

As things stand, however, I’m not ready to invest. Competition worries me, particularly from deep-pocketed powerhouses Temu (owned by PDD Holdings) and Shein.

However, I have downloaded the ASOS app to have a gander at these clearance sales. I’m in the market for summer holiday clothes.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and J Sainsbury Plc. 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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