In early trading on 26 September, the ASOS (LSE:ASC) share price was up 1%. This might surprise some, given the release of a trading update for the period through to the beginning of September.
With total group revenue down 12% versus the same period last year, some might classify this as a poor set of results. Yet here’s why there’s more to it than that.
The brief backstory
For those that don’t follow ASOS that closely, the business has struggled since we’ve come out of the pandemic. The stock is down 36% over the past year, reflecting the move from a profit after tax in 2021 to a loss in 2022.
A lot of pessimism has been built in to expectations of the brand, even though the management team are working hard to cut costs and restructure the firm.
It’s true that the fall in revenue isn’t a good sign. It shows that demand is falling. In a very price competitive segment of the fashion space, ASOS needs to have top line growth to survive.
Looking past the headline figure
A major reason for the positive reaction in the share price initially is due to the upbeat commentary. For example, even with the lower revenue figure, it expects the last quarter to be profitable. This is due to the cost savings and cuts made in the business.
Looking forward, the business is pursuing a new stock inventory model. This involves “buying less on faster lead times with more flexibility.” This should certainly help to avoid being sat on large levels of stock (a problem in the past) which also ties up cash and hurts overall cash flow.
Smaller changes are also making a big impact. The report talked about restricting Buy Now Pay Later options, which has lowered the return rate of goods. In turn, this helps to reduce old inventory that has been returned and has to be resold.
Limited room to fall further
Another key factor that’s supporting the stock price is the fact that it has already fallen so far. I argued earlier in September that I thought the stock was becoming undervalued.
One reason to support this is the fact that Mike Ashley at Frasers Group is buying up stock in the business right now. He’s a shrewd investor who knows the retail market well.
So despite the drop in revenue in the latest results, I think some investors are reluctant to panic sell because the share price isn’t inflated or overvalued. If anything, I feel that the share price could rally in coming days as the results are digested more fully.
Granted, it’s still too early to say if the cost saving programme and new initiatives will be a game changer. I’m not expecting the stock to reach the 52-week highs above 1,000p anytime soon.
But given the green shoots that are emerging, I think investors could consider dipping their toes in the water with a small investment.
