ASOS (LSE:ASC) delivered record results for the six months to 28 February 2021. Sales rose 24% and the online fashion retailer produced profits of £112.9m versus £30.1m during the same period last year. Overall, ASOS benefited from the pandemic.
Despite exceptional results, the ASOS share price showed volatility. The initial 2% gain was as I expected, but the price swiftly declined.
There are multiple possible reasons for the short-term reactions in the ASOS share price. It’s possible that after a 42% rise last year and a 19% increase year-to-date, the ASOS share price is in a consolidation phase.
In addition, ASOS said it was cautious about the near-term consumer outlook because of uncertain economic prospects for its younger target market. Other risks highlighted the timing of global re-opening and potential further Covid-19 peaks.
Customers sending back fewer items while restrictions were in force provided ASOS with a boost, but this is likely to reverse as the economy opens up and customer returns normalise to pre-pandemic levels.
Is the ASOS share price too low?
Despite these risks, there is much to like about ASOS and reasons to believe the share price could be too low. I’m impressed by its ability to pivot from clothes traditionally bought for going out to more casual clothing suitable for staying in. Its ability to quickly execute this dramatic shift in consumer purchasing habits is remarkable and highlights management competency.
During the lockdown, there was more emphasis on activewear, casual clothing, and beauty products. The strategy was a success. ASOS experienced excellent sales growth, an increase in customer numbers, and profitability.
In the UK, growth was exceptionally strong. UK sales showed growth of 39%, versus sales growth of 18% in the EU and 16% in the US. Its active customer base increased by 1.5m over six months, giving a total of 24.9m.
I’m not currently an ASOS investor but I am tempted to buy some shares after this update. It offers a double-digit return on capital, favourable growth prospects, and good cash generation. I’m confident it could be a much larger business in three-to-five years and I think the ASOS share price is now too low.
Winners and losers of fashion retail
The pandemic created winners and losers in fashion retail. Some companies struggled and were forced to sell off much-loved brands. In the coming years, ASOS is likely to be seen as one of the winners, in my opinion. During the period, the company was able to acquire four iconic brands – Topshop, Topman, Miss Selfridge and HIIT.
Adding the brands to the ASOS platform seems to have been seamless. Looking forward, ASOS is confident in achieving strong financial returns from these popular brands.
Other winners in the sector that stand out include Next and Boohoo. I picked Next as my top FTSE 100 pick recently. One characteristic that the three have in common is their ability to pivot their business when the market changes. This entrepreneurial leadership should drive these companies into becoming larger businesses, and I would happily own them all.
Harshil Patel owns shares of Boohoo. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended ASOS and 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.