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On 16 March 2018, one ASOS (LSE: ASC) share would have cost me about £76. Today, I can buy that same share for just £4.55. That’s a fall of 94%!
Yet the online fashion retailer remains popular in the UK, and owns other well-known brands such as Topshop, Topman, and Miss Selfridge.
So, should I invest in the stock while it’s under a fiver? Here’s my take.
Post-pandemic woes
During the pandemic, when everyone was stuck at home, ASOS saw a massive surge in profits. Unfortunately, that proved to be short-lived and the company has since struggled in a high inflation environment.
In particular, it has been unable to pass on its own rising input costs to its customers, whose budgets have also been stretched. As a result, its previous 4% operating margin collapsed in its interim results for the six months to the end of February.
UK sales fell 10% year on year, while Europe was flat and the US declined 7%. Worryingly, other worldwide sales slumped 12%. Overall, it incurred a half-year loss of £291m compared to a loss of £15.8m recorded during the same period the year before.
Since then, the retailer has tapped shareholders for £80m and strengthened its balance sheet through a long-term £275m financing facility. But the company’s net debt still stood at £431m in May, which I find concerning.
Turnaround strategy
Last year, CEO Antonio Ramos Calamonte set out a turnaround plan to return the fashion group to sustainable profitability. As well as cost savings, a major part of this has been a focus on the bottom line rather than top-line growth. That has meant axing unprofitable products and raising prices on others.
However, in its most recent Q3 trading update, ASOS reported losing around 800,000 active customers from the 24.9m reported at the end of February. That’s not too alarming, I feel, as losing some customers seems to be a necessary tradeoff in order to improve profitability.
Encouragingly, the firm is already making progress here, as its earnings before interest and tax (EBIT) was up over £20m compared to last year.
My move
In 2021, ASOS paid £330m in total for Topman, Miss Selfridge and activewear brand HIIT. That is only £200m less than the current market cap of ASOS!
So it’s not surprising to see retailer Frasers Group taking the opportunity to buy shares on the cheap. The company’s stake in ASOS now amounts to 19.3%.
Normally, this would signal that a takeover bid might be imminent. However, Danish billionaire Anders Holch Povlsen remains the largest shareholder, with a 27% stake. An acquisition would require his consent, which muddies the waters a bit here.
In terms of valuation, I can’t look at the stock’s P/E ratio, as ASOS is currently loss-making. But it does have a very low price-to-sales (P/S) ratio of 0.13, which is unsurprising as its sales are falling. But it does suggest that a genuine turnaround in the business could lead to a sharp rebound in the share price.
However, I’m worried about competition, especially Chinese fast fashion app Shein. It has an estimated 75m active shoppers, three times ASOS’ total, and is growing rapidly. Therefore, I’m in no rush to invest and think there are safer growth stocks to buy.
