ASOS (LSE:ASC) is a big-name UK retailer. As well as selling branded clothing on its website, it also sells own lines, mainly targeting young adults. Given the powerful online presence and distribution network it has, the pandemic has been good for business. But after the announcement of stellar half-year results yesterday, ASOS shares actually fell. What’s going on here?
Positive results
ASOS shares closed Wednesday just below 5,800p, but closed yesterday just above 5,600p. As I write, the shares are down another 4% today. Usually I would note such a move in line with a disappointing set of results. But the results were quite the opposite.
Half-year numbers through to the end of February 2021 showed revenue growth of 24%. This helped to generate an adjusted profit before tax of £112.9m. I use the word adjusted as this doesn’t take into account the outlay for acquisition of the Topshop brands from the failed Arcadia group.
The growth in financials also boosted its cash position, something that’s a welcome buffer to have during uncertain times. As of the end of February, net cash stood at £92m, even with the acquisition outlay of circa £266m.
All of this sounds positive, and to be fair ASOS shares did jump in the very short term on release. However, for much of Thursday and today, the price has been falling.
Reasons for the fall in ASOS shares
There are several reasons why I think ASOS shares have fallen. Firstly, I think the expectation of good results had already been priced in. Since the start of 2021, ASOS shares are up 13%. Over the past year, this increases to over 140%. So I do think that investors were already expecting strong figures to come out. Confirmation of those figures, if anything, was a slight anti-climax.
This also ties in to an old finance phrase to “buy the rumour, sell the fact”. Often shares rally based on speculation that results will be good, and then sell off when the reality happens.
Another reason I think ASOS shares took a hit was because it acknowledged the benefit that Covid-19 has provided. It estimated that the Covid-19 tailwind accounted for £48.5m in profit before tax. Although it also saw higher costs due to the pandemic, the net impact was definitely positive.
So the concern here is that the great performance may not be replicated going forward if the impact of the pandemic subsides. For most companies, this would be a good thing as the pandemic has been a drag, but for ASOS this might be a negative. Hence, the fall in the shares.
One final reason why ASOS shares might have fallen is due to the news of a new debt issuance worth around £500m. This is to generate cash to refinance the acquisition of the Arcadia brands mentioned earlier. I don’t personally see this as a huge issue, but the taking on of additional debt could be a worry for investors.
Overall, I don’t see any major issues with ASOS shares, so would look to buy on this short term dip.
