Last time I wrote about online fashion retailer ASOS (LSE: ASC), the firm had just issued a profit warning. That was back in December. Today, the online fashion retailer has done the same thing again, slashing profit forecasts for the year because of warehousing problems. The ASC share price is down by 14% at the time of writing and has now dropped more than 60% in 12 months.
But this retailer is continuing to expand. Sales rose by 13% to £2,234.3m during the 10 months to 30 June.
With the stock trading increasingly close to five-year lows, I’ve been wondering whether this could be a good time to buy ASOS, ahead of a possible recovery.
What’s gone wrong?
Profit warnings fall into two categories, in my experience. Some are really bad — they indicate that a business is suffering serious problems that could have a lasting impact. But some profit warnings are caused by one-off problems that can be fixed, and should have no lasting impact.
In my view, today’s profit warning is the second kind. The company has messed up the rollout of new technology in its Berlin and Atlanta warehouses. As a result, stock availability has been restricted. This means European and US sales growth has been lower than expected.
Pre-tax profit for the year ending 31 August is now expected to be £30m-£35m, down from previous forecasts of about £55m.
This isn’t good news — but common sense suggests these problems should be fixable. Chief executive Nick Beighton expects operations to return to normal by the end of September.
Are the shares cheap?
I think the impact of warehouse problems will be temporary. So do ASOS shares offer value? Unfortunately, I’m not convinced.
UK sales weren’t affected by warehouse problems. But sales in the group’s home market only rose by 16% to £815.6m during the first 10 months of the year. If this is the best that can be expected worldwide, then I think we need to take a cautious view on valuation.
Analysts’ forecasts for the 2019/20 year (which starts in September) suggest the firm will generate earnings of 82p per share next year.
Given that the warehouse disruption is expected to extend into September, I suspect these forecasts will be trimmed after today’s news. I’m assuming a figure of about 75p per share. Based on the last-seen share price of 2,390p, this gives a forecast price/earnings ratio of 32. In my view, that’s probably high enough for now.
Buy, sell or hold?
Although ASOS’ warehouse problems should soon be fixed, the group’s growth appears to be slowing. Profit margins have come under pressure in recent years and spending has also been high.
The firm expects to report net debt of £100m at the end of August — the first time it’s failed to end the year with net cash on the balance sheet.
After two profit warnings in 12 months, I think it makes sense to be cautious about the outlook for ASOS. The group’s historic growth may not be sustainable. And US expansion has often cause problems for UK retailers. For now, I’d rate ASC stock as a hold, at best.
