Is Now The Time To Buy ASOS plc?

ASOSOnline fashion retailer ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) has delivered meteoric returns for shareholders since floating on the stock market in 2001 — even after the dramatic fall of its shares to £27.50 from a high of over £70 as recently as February.

Storm in a tea cup

I was already beginning to get interested in ASOS before the news broke at the weekend of a fire at the company’s distribution centre at Barnsley.

The fire has turned out to be a bit of a storm in a tea cup. ASOS informed the market this morning that none of the technology, automation or structure of the building had been affected, and that while some 20% of the stock had been damaged and website orders had been briefly suspended, the company is “fully insured for loss of stock and business interruption”.

The shares took a brief panic-dive this morning, but are trading little changed from Friday’s close at the time of writing.

A great business

ASOS has a winning business model. It focuses on fashion-conscious 20-somethings, selling cutting-edge ‘fast fashion’, with exemplary customer service, and has cannily created a loyalty-inspiring web and social media hub for its ‘community’ of 8.6 million (and rapidly rising) active customers.

ASOS sells a mix of own-label, global and local brands, and while the company already delivers to “almost every country in the world”, there’s still plenty of global market share to shoot for. Sales growth of around 30% is forecast for the firm’s current fiscal year to 31 August, and sales are expected to smash through the £1bn mark next year.

Why have the shares fallen?

If ASOS is such a great business, and the fire at the weekend was a storm in a tea cup, why have the shares fallen from over £70 to £27.50 in the space of four months?

Well, firstly, management announced in March that they had accelerated investment in warehousing in the UK and Germany, in the company’s China start-up and in technology, resulting in significantly higher capital expenditure than previously guided for the year — and reduced profitability.

Short-term share traders didn’t like it, of course, but seasoned growth investors, who take a long-term view, know that all high-growth companies go through phases of heavy capital expenditure — and, in fact, that this is a healthy indication of demand and prospects of future growth.

ASOS’s shares took a another knock when the company released a trading update earlier this month. Management warned on a further reduction in profitability for the year; not due to increased investment this time, but to a slowdown in the growth of international sales, due to the strength of Sterling and the need to up promotional activity.

International sales rose 17% (+28% at constant exchange rates) for the quarter ended 31 May, and gross margin was down nearly 4%. While slower sales growth and lower margins can never be said to be welcome, again, for long-term investors, this isn’t a major disaster, given the company’s solid global prospects and the vagaries of currency movements that can work both for and against businesses from time to time.

Is now the time to buy? 

At £27.50, ASOS is trading on 2.3 times sales and 64 times earnings for the current difficult year. Next year’s forecasts drop the ratings to less than 2 and 46, respectively.

The numbers may make the toes of a value investor curl, but aren’t outrageous for a top-notch, high-growth business. Certainly, £27.50 is eminently more attractive than the £70 some investors were willing to pay just a few months ago!

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G A Chester does not own any shares mentioned in this article. The Motley Fool owns shares in ASOS.