It’s been a brutal year for ASOS (LSE:ASC) shareholders. The fast fashion retailer was demoted from the FTSE 250 index a few months ago and the ASOS share price has tumbled nearly 25% since the start of January.
However, despite a gloomy 2023 overall, the stock has rallied in recent days. Today, the shares are trading above 400p — they have struggled to stay above that price since May. So, is this the bottom for ASOS shares and should potential investors consider buying today?
Here’s my take.
Weak financials
Some key numbers in the company’s FY23 earnings report will give investors reasons to be anxious.
Adjusted group revenue slumped 11% to £3.54bn, net debt ballooned from £152.9m to £319.5m, and the business suffered an adjusted pre-tax loss of £70.3m after turning a small £22m pre-tax profit in FY22.
Concerningly, the board doesn’t anticipate a quick recovery from the current malaise. In fact, it expects sales will decline further in FY24, by somewhere between 5% and 15%.
These figures show the significant risks facing ASOS shares. After all, investing in an unprofitable firm with falling revenues and razor-thin margins isn’t for the faint-hearted.
Competition risks
To compound difficulties, competition in the fast fashion sector is increasingly fierce. Gen Z customers form the core of ASOS’ target market. But, these agile consumers are increasingly opting for products from rivals like Chinese online clothing retailer Shein.
Indeed, ASOS isn’t the only UK fashion stock that’s suffering. For instance, AIM-listed firm boohoo has endured a cataclysmic 84% share price decline over five years.
Turnaround plan
Despite the challenges, ASOS is making progress across several metrics, which could help to support a sustained share price recovery.
Rising stock levels and inventory eroded the company’s margins over recent years. Therefore, streamlining the business is a major priority. A 30% inventory reduction in FY23 — ahead of the approximately 20% target — was encouraging to see.
In addition, the new Test & React model, which moves high fashion products from design to site within two weeks, shows promise. ASOS’ successful pilot demonstrated it turned stock into business faster than standard practice and proved particularly popular with younger customers.
Takeover target?
Speculation is growing about the company’s potential as a takeover target. This might have a positive impact on the ASOS share price. However, that’s difficult to determine before the details of any possible agreement are known.
For now at least, Shein is eyeing up parts of the business. It recently registered an interest in acquiring Topshop, which ASOS previously bought in 2021 from Sir Philip Green’s crumbling Arcadia fashion empire.
This is important considering Frasers Group now owns a near-20% stake in ASOS after Mike Ashley’s recent buying spree. The FTSE 100 company sold its Missguided brand to Shein last week. Potential investors should monitor developments on this front closely.
A stock to buy?
Undeniably, I’m tempted by ASOS shares at today’s price. However, in my view, it’s too early to say the bottom is in.
Generally, I’m wary about investing in unprofitable businesses when it comes to my portfolio — and ASOS’ FY24 guidance doesn’t fill me with enough confidence to buy today.
Potential investors can consider whether they deem the opportunities sufficiently attractive to compensate for these risks.
