What happened to ASOS (LSE: ASC) shares? Only a few years ago, the fashion retailer was a darling of the stock market. The stock skyrocketed to a near £6bn market value and was within spitting distance of the FTSE 100.
But then came a rapid fall from grace. The firm’s share price went into freefall as investors fled the stock. Each £1 invested at the top would now be worth a miserly 5p. To call it a disaster might be an understatement.
As for why the stock crashed, well, that might be the strangest part of the story because it dropped while the firm posted record revenues. So what happened here? And more to the point, is this a sorely undervalued stock ready to rise from the ashes? Let’s take a look.
Should you invest £1,000 in Admiral right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Admiral made the list?
To start with, we need to bear in mind what ASOS actually does, as this isn’t just a bog standard clothes seller. The company is a world leader in ‘fast fashion’. That’s a business model that reacts to trends (say, from catwalks or celebrities) and mass-produces them very quickly to maximise sales while the trends are hot.
Fashionistas
Fast fashion items aren’t necessarily made to last and in the business model’s early days, there was even an idea that consumers could buy an outfit, wear it once then bin it. But sustainability awareness has changed that.
In any case, this business model was hugely popular and grew to billions in revenue. Investors liked the look of it too, despite very fine margins on its products, and the share price went for hefty valuations.
The last high was reached in 2021 when wannabe fashionistas were stuck inside their homes and could only buy fashion online rather than in physical stores.
The firm was trading at nearly 50 times earnings at this point. It seemed like ASOS was perfectly set up to capitalise as people started to buy their clothes online more often. Then, it all went into reverse as physical stores recovered more quickly than expected and online returns accelerated.
Sales continued to increase but inflation and a cost-of-living crisis pummelled the margins. The operating margin of 4.9% in 2021 fell to -0.5% in 2022 – “mainly driven by increased markdown and elevated freight costs”. So the clothes are being sold cheaper and being produced for more. Makes sense, when put like that.
Where are we now? Well, we’ve got a new CEO in charge, José Antonio Ramos Calamonte, who has enacted a raft of efficiency improvements to turn the margins around.
Am I buying?
The 26 September trading update told us a little of how he’s getting on. Sales were down, an average of 15% across the board. This was deliberate, with the idea being to focus on more profitable customers. With a 150 basis points increase in gross margins, it looks like the numbers are moving in the right direction.
The update didn’t do much for the share price though. The price didn’t move at all after the news and is still down 13% over the last month. I suspect that lacklustre earnings (which weren’t revealed) despite all the cost-cutting might be a reason.
And that brings me to what I feel is the main question here. Is there space in the market now for a clothing retailer with razor-thin margins? I don’t have the answer, but I can say I won’t be buying ASOS shares any time soon.
