ASOS share price rockets 30%! Time to buy?

Online-only fashion is crushing the high street as sales and profits rocket, but which one makes the best investment case?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Something very odd happened to the ASOS (LSE:ASC) share price when annual results hit the market on Wednesday.

A whopping gain of 28% in a single day. The largest one-day hike since 2004. It must have been stellar news then? Nope.

Profits crumbled by 68% year on year, down to £33.1m from £102.1m. Earnings per share were crushed by 70%, down from 98.9p to 29.4p, while the balance sheet is now weighed down by net debt of over £90m, compared to a net cash position of £42.7m in 2018.

Showing an impressive ability for understatement, CEO Nick Beighton said: “Clearly last year did not go as well as we planned.

ASOS share price woes

When you see words like “disappointing” in a set of results, it’s usually a sign to get the hell out of there.

But check again today and the stock is up another 4%–6%, taking the trailing price-to-earnings (P/E) ratio over 110.

In fact, ASOS, which caters to fashion-conscious millennials, had an annus horribilis. Two successive profit warnings saw investors scatter to the winds, and in December 2018 alone the ASOS share price plunged by 40%. After-tax profits have been trending upwards every year since 2015, but £24.6m this time round, compared to £82.4m in 2018, represents a significant stall in momentum.

So what happened?

Well-publicised IT problems at its European distribution centre in Berlin meant severe delays in processing orders, while a new Atlanta warehouse that opened in February struggled to cope with demand and ran out of stock.

When you consider how important delivery-on-demand is for online-only retailers, you’ll know how much of a problem this is.

But it all comes down to expectations. We knew in July that pre-tax profits would be significantly under the £55m analysts predicted, and the market doesn’t mind that, in Beighton’s words, ASOS was “over-ambitious“. And the logistical struggles that caused such upset in the supply chain are now over and done with, Beighton claims.

While the market will take as a positive UK sales growth of 13%, backed by a 12% sales lift in Europe and a 9% boost over in the US, I think there are better options for investors looking to cash in on online-only retail.

I’d even go so far as to say that giant warehouse operators like Tritax BBOX — with 4.5% dividends and enviable customer lists — rather than the clients who fill them, are a better investment play given the circumstances.

BOO to a goose

ASOS doesn’t have the same cachet as its rival Boohoo (LSE:BOO), whose sales are increasing at a much faster rate. A 34% overall hike in the first half of the year was backed by another triple-digit sales surge from the NastyGal brand. In the six months to 31 August, pre-tax profits were up 83%.

BOO just keeps on smashing expectations. Another lift from a September interim update saw net cash grow to £207.4m, with revenues passing £1bn for the first time.

And while a P/E ratio of 65 is way, way out of bounds in normal times, the stock has grown 565% in the last 5 years. In 2007 a little company called Amazon had a similar P/E ratio. That’s not to say BOO can make billionaires of us all, but you get my point.

If you want in on the trend, there’s only one common-sense choice, in my opinion.

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.

Tom Rodgers owns no shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. 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

Investing Articles

Should I still be cautious about Rolls-Royce shares?

Rolls-Royce shares are flying. But is now the time for this Fool to open a position? Here, he explains why…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Is the Diageo share price coiled to rebound?

Christopher Ruane explains why he remains bullish about the long-term outlook for the Diageo share price and would happily invest…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

How I could make a 10% yield for high passive income a reality

Jon Smith explains how he can target high passive income from top-yielding stocks, including one specific example he'd consider.

Read more »

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »