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ASOS soars 20%! Time to buy?

There was a period when online fashion giant ASOS (LSE: ASC) could do no wrong. People were increasingly flocking to its site and shunning the traditional high street retailers. Investors clamoured for the shares.

Over time, however, it became clear the company wasn’t immune to competition or falls in consumer confidence, thanks to things like Brexit. Margins dipped, profit warnings were issued, logistical problems were encountered and market participants, once attracted to the company for its stellar growth, headed for the exits in their droves. At the close yesterday the shares, which were changing hands for just over 6,000p each a little less than a year ago, were 57% lower in value. Today, however, the stock is absolutely soaring. What’s going on?

Back on track?

It’s all down to the publication of the firm’s latest set of full-year numbers. As expected by analysts, group revenues climbed 13% to £2.73bn over the 12 months to the end of August. Sales growth in the UK was a highlight, rising 15% to a little under £1bn compared to the previous financial year. Providing support for the company’s growth strategy, international retail sales also increased by 11%, to £1.66bn.

Now for the less appetising numbers. Once again, investors won’t have appreciated a reduction in gross margin, from 51.2% to 48.8%, this time around. Pre-tax profit fell no less than 68% to £33.1m as a result of “substantial transition and restructuring costs” which also led the company to report a net debt position of £90.5m on its balance sheet compared to a £42.7m surplus the year before.

Commenting on today’s results, CEO Nick Beighton said the company’s decision to increase investment had proven “more disruptive” than expected and, while positive on the next financial year, he reflected that “there remains lots of work to be done to get the business back on track.”   

So, a mixed report but, based on the share price reaction, clearly not as bad as some in the market were expecting. Sometimes, simply not issuing another profit warning can be all it takes. That said, I’m still not a buyer.

Still expensive

For me, ASOS’s valuation will always be its sticking point. While I don’t doubt it’s likely to be one of only a handful of companies with sufficient resources to compete for the global online fashion industry’s crown, that doesn’t make it a great investment.

A forecast price-to-earnings ratio of 44 for FY20 before markets opened this morning may have been less expensive than AIM-listed peer Boohoo (on 53 times), but the huge jump in the shares today is likely to have significantly closed that gap. What’s more, Boohoo remains a far better business based on the sky-high returns on capital it has been able to consistently generate from the money it has invested. Recent trading — covered by my Foolish colleague Edward Sheldon — has also been hugely impressive.

On top of this, it should be mentioned that ASOS is still attracting the attention of short-sellers, with 4% of its stock being shorted at the end of play yesterday. While some may have closed their positions this morning, it’s worth highlighting no one is betting against Boohoo at all, at least according to shorttracker.co.uk.

Holders will no doubt be comforted by today’s rise, but I’ll continue to give ASOS a wide berth. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.