The ASOS (LSE: ASC) share price fell sharply in early trading this morning as investors reacted negatively to the latest set of results and a boardroom shake-up. Having been bullish on the stock earlier this year, is it time to change my stance on the fast-fashion giant?
Revenue and profit jump
Seen purely in isolation, today’s numbers were hardly awful.
Group revenue climbed 20% to just over £3.91bn in the year to the end of August. A particularly strong result was achieved in its home market with UK sales jumping 36%.
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Having said this, gross margin declined to 45.4% due to a toxic combination of “elevated freight and Brexit-related duty costs, product mix, FX headwinds and increased customer investment“. ‘Rest of World’ sales were also impacted by Covid-19 “disruptions“, the company said.
Still, ASOS’s bottom line was hardly in bad shape. Reported pre-tax profit rose 25% to £177.1m.
Unfortunately for existing holders, here’s where the good news ends.
CEO departs
In a separate statement today, ASOS revealed that CEO Nick Beighton would be leaving the company with immediate effect. A search for his successor is now underway.
Clearly, all companies will periodically require new leaders/fresh blood. After 12 years at ASOS (and six leading it), Beighton’s departure isn’t entirely unexpected. For its part, the company reflected on wanting to have the best team in place to target annual revenues of £7bn within three to four years and become “one of the few truly global leaders in online fashion retail”.
If this were the case, however, you would think that a new CEO would already be waiting in the wings. The fact that no one has been lined up is disappointing, in my view.
ASOS share price: a warning?
Despite recovering slightly, the ASOS share price is down a bruising 10% as I type. This means the company’s value has nearly halved in 2021 so far. In the last 12 months, it’s down a staggering 53%.
Things could easily get worse in the months ahead. Supply chain pressures won’t go away quickly. In fact, the company believes that this issue will lead to “mid-single-digits” revenue growth in H1.
When this headwind is combined with further investment and a return to normal returns rates, full-year pre-tax profit is now predicted to between £110m and £140m. Achieving the lower number would represent a near-40% decline. Seen from this perspective, I’m not surprised the ASOS share price has tumbled again.
My verdict
I’ll hold my hands up and say that I thought ASOS already presented as a potential bargain before today. Although no one can reliably predict where share prices will go in the near term (not to mention accurately call a management merry-go-round), my timing was clearly off.
Even so, I continue to believe that the fragility of the ASOS share price is ideal for patient growth investors who can march to their own beat. Despite the departure of its CEO, this remains a good business with £200m in net cash, a huge following and a sound strategy for growth (including the acquisition of Topshop and a partnership with Nordstrom).
Were it not for the fact that I’m already heavily invested in rival Boohoo, ASOS would probably top my shopping list today. The sector sell-off looks overdone, in my opinion. As things stand, however, I’ll remain on the sidelines for now.
