Over the past five years, ASOS stock prices have fallen 92%. Should you make a current investment in the fast fashion company in case there is a significant turnaround?
One ASOS stock would have cost you around £76 on March 16, 2018. That same share is currently available for just £4.55. That is a 94% decrease!
Even yet, the UK continues to be a big market for online fashion company, which also owns well-known labels like Topshop, Topman, and Miss Selfridge.
So, should you buy the stock now, when it is only five pence? Here’s our opinion.
Post-pandemic problems
When the pandemic hit and everyone was confined to their homes, ASOS’s sales skyrocketed. Unfortunately, that was short-lived, and the business has subsequently struggled in an environment with high inflation.
Particularly, given the tightened budgets of its clients, it has been unable to pass on its own increased input prices to them. As a result, in its interim results for the six months ending at the end of February, its prior operating margin of 4% collapsed.
Sales in the US were down 7%, flat in Europe, and 10% down in the UK year over year. Other global sales fell alarmingly by 12%. In total, it lost £291 million for the first half of the year versus a loss of £15.8 million the year before.
Since then, the store has raised £80 million from shareholders and added a long-term £275 million credit facility to its financial sheet. However, the company’s net debt was still £431 million in May, which is worrying to us.
Turnaround approach
The fashion group’s CEO Antonio Ramos Calamonte outlined a turnaround strategy last year to bring about long-term profitability. This has included an emphasis on the bottom line rather than top-line growth in addition to cost cuts. This required eliminating unsuccessful products and raising pricing on others.
However, ASOS reported losing almost 800,000 active customers from the 24.9 million recorded at the end of February in its most recent Q3 trading statement. That is not too concerning, in our opinion, as it appears that losing some clients is a necessary trade-off to increase profitability.
It is encouraging to see that the company is already making strides in this area as earnings before interest and tax (EBIT) increased by almost £20 million from the previous year.
Do not be hasty
For Topman, Miss Selfridge, and the athletic wear company HIIT, ASOS spent a combined £330 million in 2021. That is only £200 million less than ASOS’s current market value!
Therefore, it is not unusual to see retailer Frasers Group take advantage of the chance to purchase shares at a discount. The business currently owns 19.3% of ASOS.
Typically, this would indicate the possibility of an impending takeover offer. With a 27% stake, Danish billionaire Anders Holch Povlsen nevertheless continues to be the largest stakeholder. His approval would be required for any transaction, which somewhat complicates the situation.
We cannot examine the stock’s P/E ratio in terms of valuation because ASOS is now in the red. However, given that its sales are declining, it does have a very low price-to-sales (P/S) ratio of 0.13, which is not surprising. However, it does imply that a genuine corporate turnaround could trigger a rapid increase in share price.
But the competition worries us, particularly the Chinese quick fashion app Shein. It is expanding quickly and has an estimated 75 million active customers, three times ASOS’ total. Since there are safer growth stocks to buy, we are not in a rush to invest.
Talk about bids
Some investors are anticipating a takeover and are becoming excited.
However, two additional shareholders who possess 41% of the company and will have a significant impact on the future ownership of the company are Camelot Capital Partners and Danish retail tycoon Anders Holch Povlsen.
Additionally, not everyone likes ASOS as much as Frasers.
It is the stock that has been shorted the most on the LSE, according to the Financial Conduct Authority. In the hopes that the company’s shares will lose value, seven entities have borrowed 5.35 percent of them.
The company did, however, return to profitability in its most recent trading statement, which covered the three months ending May 31, 2023.
Despite a 14% decline in revenue from the same period in 2022, profit per order increased by 30%. The business is managing its inventory more effectively and focusing more on profits than sales.
Experts opinion
The 23 analysts who follow the stock appear to concur that the business has made progress.
Everyone anticipates EBIT (profits before interest and taxes) to be positive in 2024 and 2025.
| Forecast EBIT (£m) | 2023 | 2024 | 2025 |
| Consensus | (24) | 60 | 89 |
| Minimum | (43) | 30 | 57 |
| Maximum | (14) | 105 | 129 |
The price-to-earnings ratio for Frasers is 11. This would suggest that ASOS has a market cap of £660 million based on the consensus projection for 2024. The increase over its existing stock market valuation is 37%.
The amount of £979 million is obtained for 2025 using the same process.
Verdict
There is a wide range in the analysts’ predictions, therefore it is obvious that they could be mistaken.
According to ASOS, their goal is to become the go-to website for 20-somethings who love fashion. That is a sizable potential market given that there are 1.2 billion of them on the earth.
And in July 2023, its website received over 75 million visitors.
But the business has never distributed dividends. The fact that one of the co-founders recently sold £1 million worth of stock is also distressing. We usually feel uneasy whenever an insider sells a significant portion of their stock.
We believe that ASOS stock is currently a fantastic value. Purchase the shares if you have extra money.