The ASOS (LSE:ASC) share price has performed dismally over recent years. The online fashion and cosmetics retailer was once valued at around £6bn, but today its market cap has dwindled to less than £0.5bn. Consequently, the company was demoted from the FTSE 250 index this month.
So, what went wrong for the business? And does the downtrodden share price present a cheap buying opportunity today?
Here’s my take.
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A crumbling fashion empire
The fast fashion sector is notoriously competitive. To its credit, ASOS has intellectual property strength in its brand portfolio, which contains familiar names such as Topshop, Topman, and Miss Selfridge.
However, the rise of Chinese rival SHEIN has put pressure on UK retailers, including ASOS and its close competitor boohoo. To add to the difficulties, razor-thin margins and supply chain issues mean business is tough.
Recent third-quarter results demonstrate the scale of the challenges facing the company. It was good to see ASOS return to profitability, with underlying operating profit climbing £20m compared to the prior year. However, revenue slumped 14% to £858.9m and active customers fell by 800,000 to 24.1m. Worryingly, the company’s turnover is going into reverse across all geographies.
ASOS raised £80m of funds in the last month and it also managed to secure a long-term £275m financing facility. That should give the business some financial headroom as it continues to strive for cash generation and profitability as the year progresses.
Future prospects
Cost-cutting appears to be the firm’s central strategy as it seeks to chart a path towards strong profitability over growth. ASOS has already made £200m in efficiency savings this financial year and anticipates it will meet its £300m target by the end of the year. What’s more, inventory has been slashed by 15% compared to 2022.
There appears to be progress in terms of profits. That’s certainly a positive, but there’s still a long way to go. In addition, the company is pulling investment from overseas markets like the US after disappointing results. This could limit future growth in the ASOS share price, even if the balance sheet improves.
One possible eventuality investors should consider is the company’s growing appeal as a takeover target. This could be good news for shareholders, but the impact of an acquisition on the share price is difficult to predict with any degree of certainty.
Plus, Mike Ashley’s company, Frasers Group, recently boosted its stake in ASOS to 9.9% of its shares. If it increased its shareholding to 10%, Frasers would have the power to block any takeover attempt. This could quash speculation that Danish billionaire Anders Holch Povlsen, who owns over a fifth of ASOS shares, might successfully acquire the company.
A stock to buy?
If investors are considering buying, now could be an opportune time with the share price languishing near a five-year low. Provided the company’s turnaround plan is executed well, it might be a profitable investment.
However, the challenges facing ASOS are daunting. Much will need to go the company’s way for a sustained recovery to materialise. When it comes to my own portfolio, I’m not convinced the risk/reward profile of this stock is sufficiently attractive. I won’t be buying.
