ASOS (LSE: ASC) shares fell by 25% during early trading on Thursday morning, after the online fashion retailer slashed its profit guidance for the year. Today’s plunge takes the stock below 1,000p for the first time since 2010.
ASOS stock touched a high of 7,700p in 2018, but has fallen by more than 80% over the last year. Such a massive fall suggests to me that this business might be a bargain buy for my portfolio. However, this situation carries some risk too.
ASOS has problems
Annual sales at ASOS have risen by 60% to £3.9bn, since the shares peaked in 2018. But as the old stock market saying goes, sales are vanity, but profit is sanity.
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ASOS’s profit margins have collapsed over the last year. The company says this is due to “uncertain consumer purchasing behaviour”, rising costs, and higher return rates.
In today’s profit warning, the company said that adjusted pre-tax profit for the year is expected to be £20m-£60m. That’s less than half the company’s previous estimate of £110m-£140m, which was issued in January.
For me, this new forecast flags up some risks. Given that ASOS’s financial year ends in less than three months, there’s a very big range between £20m and £60m. This highlights the uncertainty the company is facing.
Management doesn’t know whether sales levels or return rates will improve over the summer. If they don’t, then the company could be forced to slash prices to get rid of unwanted stock.
I’m still interested
I still see some reasons to be optimistic about the outlook for ASOS. The company said that a lot of its current problems are due to temporary headwinds, as life returns to normal after the pandemic. I think that’s fair, at least to some extent.
People’s shopping habits are changing as they start buying more clothes for special events and holidays. There’s also been a big increase in labour and transport costs.
Another piece of good news is that ASOS now has a new chief executive, José Antonio Ramos Calamonte. The CEO role has been vacant since long-time boss Nick Beighton stepped down in October.
Mr Calamonte joined ASOS in January 2021 and is currently chief commercial officer. He’s an experienced fashion retail exec who has worked for companies including Inditex (which owns Zara) and Esprit.
ASOS shares could be cheap
Today’s trading update wasn’t all bad news. Sales for the three months to 31 May rose by 4% to £983m, driven by a 4% rise in the UK and a 15% rise in the USA.
These numbers tell me that ASOS has held on to most of the sales gains it made when online shopping boomed during the pandemic.
Another positive is that the company said it’s making good progress rejuvenating the Topshop brand, especially in the US.
At 900p, ASOS stock is trading on just seven times 2021 earnings. If Mr Calamonte can get inventory levels and logistics costs under control, then I think the shares could be cheap today.
However, I’m not going to buy ASOS shares for my portfolio. The company has an inconsistent track record and faces growing competition. I don’t have the confidence to invest. In my view, there are better opportunities elsewhere in today’s market.
