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Why Shares In ASOS plc Plunged Today

Online fashion retailer ASOS (LSE: ASC) is falling once again today, after the company issued its third profit warning in the space of a year.

ASOS now expects pre-tax profit for the year ending August 2015 to come in at a “similar” level to this year, around £45m against previous expectations of £62m. For the three months to the end of August this year, ASOS’s sales grew by just 15% year on year. UK sales expanded 33% but international sales rose by just 6%.

Furthermore, for the first time in 10 years, ASOS’s pre-tax profit is expected to fall this year. Pre-tax profit of £45m is expected, compared to £55m last year. 

Unfortunately, the company has fallen victim to the strong pound, which has forced ASOS to slash prices within international markets to keep customers loyal. According to the retailer, a strong pound has hurt sales within markets such as Russia and Australia where prices, in sterling terms, have risen around 20% over a twelve month period. 

A fire at the company’s Barnsley warehouse also dented fourth-quarter sales by around £30m. 

Commenting on today’s trading statement, Nick Robertson, CEO, commented:

“Our UK performance remained strong over the final quarter, with sales increasing 33%…Engagement with our customers remains positive with a 25% growth in active customers and increases in order frequency, conversion rate and average basket value…We remain focussed on the long term opportunity for ASOS, with £2.5bn of sales as our next staging post”.

Boosting investment 

To competASOSe with local competitors and offer a better quality of service, ASOS is planning a significant international investment programme next year. The program aims to bolster the company’s logistical infrastructure and technology platform, in order to streamline the group’s order processing.

Long term, this investment should boost ASOS’s competitiveness and quality of service, ultimately improving margins and profitability. However, long-term growth is going to come at the expense of short-term profitability. Nevertheless, with around 60% of ASOS’ sales now coming from international markets, the group needs to plan for the future. 

Some good news

Still, there was some good news today, although the news was bittersweet. ASOS’ fourth quarter sales growth was actually better than some analysts had been predicting. That said, quarterly sales growth came at a cost to gross margins, as ASOS discounted products heavily in order to compete with peers such as Boohoo.com, which have been grabbing market share. 

In the year to 31 August ASOS’s gross margin declined by 230 basis points, compared to the year ago period. What’s more, during the third quarter ASOS’s gross margin contracted further, falling 640bps compared to the year ago period.

An expensive bet

At present levels, and even after recent declines, ASOS trades at a forward P/E of around 60, which seems expensive for ASOS’s faltering growth. There’s no doubt that ASOS’s lofty valuation may put some investors off.

However, analysts here at the Motley Fool have identified a share that they believe has the potential to nearly double profits within the next four years and currently trades at an attractive valuation.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.