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.

| More on:
Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 FTSE 100 high dividend shares to consider in May

I'm building a list of the best FTSE 100 income shares to buy this month. Here are two I'm expecting…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: Share Advisor’s latest lower-risk, higher-yield recommendation [PREMIUM PICKS]

Ice ideas will usually offer a steadier flow of income and is likely to be a slower-moving but more stable…

Read more »

Investing Articles

Here’s how I’d target passive income from FTSE 250 stocks right now

Dividend stocks aren't the only ones we can use to try to build up some long-term income. No, I like…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

If I put £10k in this FTSE 100 stock, it could pay me a £1,800 second income over the next 2 years

A FTSE 100 stock is carrying a mammoth 10% dividend yield and this writer reckons it could contribute towards an…

Read more »

Investing Articles

2 UK shares I’d sell in May… if I owned them

Stephen Wright would be willing to part with a couple of UK shares – but only because others look like…

Read more »

Investing Articles

2 FTSE 250 shares investors should consider for a £1,260 passive income in 2024

Investing a lump sum in these FTSE 250 shares could yield a four-figure dividend income this year. Are they too…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

This FTSE share has grown its decade annually for over 30 years. Can it continue?

Christopher Ruane looks at a FTSE 100 share that has raised its dividend annually for decades. He likes the business,…

Read more »

Elevated view over city of London skyline
Investing Articles

Few UK shares grew their dividend by 90% in 4 years. This one did!

Among UK shares, few have the recent track record of annual dividend increases to match this one. Our writer likes…

Read more »