Beighton has blamed this on supply chain issues caused by the Covid-19 pandemic. These, as we know, are a long way away from being solved. But when I zoom out and look at the ASOS share price history, as well as the fundamentals of the business, I think that this sudden dip represents an excellent buying opportunity for my portfolio.

ASOS fundamentals

ASOS is an online retailer that focuses on the sale and manufacturing of affordable clothing. This business model comes with some benefits but a lot of risks. As an online retailer, ASOS is able to cut costs on rent and staff, two of the major expenses to any business. But profit margins for affordable fast fashion can be small, and ASOS often operates with as little as 4% net profit. This contributes to the volatility in the ASOS share price.

Share price history

The first thing I see when I look at the history of the ASOS share price is extreme volatility.

Peaking first in February 2014 with a price of 6,960p, ASOS’ stock value then suddenly dropped by 40%. After a three-year recovery it was then able peak once again in early 2018 at 7,530p. But this was once again followed by a precipitous fall.

Here, I see a boom-bust cycle caused by investor over-confidence. ASOS had been doing consistently well in the years-long run-up to these periods, but was then hit by sudden drops in revenue that scared off shareholders. I believe that the same thing is happening now.

Why I’m buying 

The fashion industry is fickle. We all need to buy clothes but no one can hope to design the best look every year.

Given that, ASOS’ fundamentals remain strong. The company has brand recognition and low overheads. It was even able to halve its debt during the pandemic and continues to have a decent price-to-earnings ratio of 13:93. This is all great news for the ASOS share price.

Now, as winter draws near, people will want to spend less time shopping outside. They will want to buy more clothes both for themselves and as Christmas presents. Given what we know about the current price of gas, I’ve been looking at their line of jumpers myself.

Why I’m not buy…yet

I will not be buying ASOS just yet. I think that the share price still has some way to fall, but I will be keeping a close eye on it. These supply chain problems are external issues (like the HGV driver shortage), rather than problems with the business model or its management. I believe we will see the ASOS share price rise once again, once these are resolved.

The post The ASOS share price has crashed. Is now the time to buy? appeared first on The Motley Fool UK.

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James Reynolds has no position in any of the shares mentioned. The Motley Fool UK 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.

Last week’s trading update for Asos saw overall group revenue surging by 23% year-on-year after management refocused growth efforts on traditional markets in the UK and EU. Alongside continued double-digit growth year after year, the company holds no debt, funding all expansion through strong operating cash flow.

Despite City analysts rushing over themselves to recommend buying-into Asos, I find there are substantial reasons to doubt the feasibility of the company as a long-term investment. While management has been wisely focusing on revenue growth over profitability in the short term, the company has yet to prove it has the pricing power necessary to increase margins when the time comes. Unlike designer fashion houses and their double-digit margins, Asos’ operating margins for the past year were 4.1% and fell over the holiday period.

Furthermore, although Asos does have very good growth prospects, I personally find it doubtful that fast fashion will prove to have more staying power than other trends in the ever-changing fashion world. Without the brand name and pricing power of high-end fashion companies I don’t believe Asos presents an appealing purchase, particularly trading at 54 times expected 2016 earnings.

Ignoring online

Primark, a division of the Associated British Foods conglomerate, has taken a different path than social media-savvy Asos by deciding to not sell online and instead expanding via high street stores. While one would normally expect this route to provide lower margins than Asos enjoys, Primark in fact boasted 12.6% operating margins in the latest full year, although the strong US dollar dented this number.

Due to Primark’s lack of online sales revenue, growth is tightly correlated to increased retail space, which is expected to grow by roughly 13% this year. With sales for the latest quarter up 3% year-on-year, dividends should be set to increase for the fifth year running although the shares currently yield a meagre 1.2%.

Conglomerates may have fallen out of fashion in many investing circles, but shares in the family-controlled ABF have provided a 180% return over the past five years. With the shares now trading at 30 times forward earnings and revenue growth at Primark (which provides some 60% of group operating profits) constrained by the need for physical stores I don’t believe now is the time to buy into ABF. Despite impressive margins and a diversified business with large defensive divisions, ABF’s fate is increasingly becoming tied to Primark, which carries with it the same long-term risk of falling out of fashion as Asos.

The post Why Investors Should Run From Fast Fashion Retailers Asos Plc And Primark Parent Associated British Foods Plc appeared first on The Motley Fool UK.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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.