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Why Shares In ASOS plc Have Plummeted

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: The share price of ASOS (LSE: ASC) has plummeted this morning. At one point it had dropped over 40%, but it’s since recovered a bit, and is currently down 31%, at around £31. The market’s mark-down of the  UK’s largest online-only fashion and beauty retailer follows the release of a trading statement for the three months to 31 May 2014, in which the company revealed that it needed to significantly reduce its margin guidance for earnings before interest and taxes (EBIT) for the current financial year, lowering it to around 4.5% from its previous figure of around 6.5%.    

So what: Aside from the obviously unwelcome profit warning, the trading statement did contain some positive indicators. Retail sales were were up 25% year on year, with UK sales increasing by 43% and international ones 17% (although growth in international sales was slowed, due to adverse exchange rates). And the number of ‘active customers’ grew by 32% year-on-year, rising to 8.6m. 

Commenting on the announcement, CEO Nick Robertson said:

Whilst our profit performance for this financial year is not what we had hoped for due to an unusual combination of factors, our accelerated investment in technology and infrastructure to support our £2.5bn sales ambition is progressing and capex remains within guided levels. All customer metrics — active customers, new customers, order frequency and units per basket — are positive and we are totally focussed on rolling out the ASOS business model globally as the world’s leading online fashion destination for 20-somethings.

Now what: ASOS has been one of the darlings of the stock market for many years. At one point in early 2014 its share price had increased by a colossal 35,000%+ since it launched at 20p per share in 2001.  Even late-comers to the party were well rewarded, with ASOS’s peak of over £70 per share at the start of January this year representing a five-year gain of over 1,700%.

But the news hasn’t been good since then. Indeed, it’s been pretty bad, with the announcement of a substantial increase in capital expenditure in March knocking 18% of the price. This was followed by half-year results at the start of April in which it revealed that sales growth was substantially up, but profit was substantially down.  All told, the share price of ASOS has now fallen around 56% since its early-2014 peak.

But even after this year’s plunge in valuation, ASOS still is a multi-billion pound business, with a turnover that’s expected to exceed £1.5bn by 2016. It’s still expanding sales, both in the UK and internationally, with a business model that’s envied by its rivals. And if it can crack the lucrative US fashion market we could see yet another period of stellar share price performance.

Perhaps now might be the time to take a long-term position in one of the stock market’s success stories whilst its price has been depressed by short-term bad news.  But that, of course, has to be your decision. 

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Jon doesn't own shares in ASOS. The Motley Fool has recommended shares in ASOS.