Lets be honest, ASOS (LSE: ASC) investors have had a bad 12 months. This month the company issued its third profit warning in less than a year, slashing its earnings expectations by more than 33% — the share price in turn, dropping about 25% on the news. This already followed a 40% fall in the stock price following its pre-Christmas profit warning in December, and as it stands ,the share price is less than half the value it was this time last year.
Demand and supply
These problems with earnings have been brought about mainly due to failures at two of its warehouse facilities in Atlanta and Berlin, where unexpectedly high demand meant the company was unable to fulfil orders in both the US and Europe.
Now, a retailer that can’t meet demand, at least in the short term, offers a somewhat paradoxical problem. Demand for its products is better than expected, but unfortunately it just doesn’t have the stock to sell (or at least is unable to get that stock to customers). Strong demand for a retailer’s product is what we might call a good problem. On the other hand, if this failure to meet demand continues, it’s not going to be making as much money as it should.
Though having three separate profit warnings and seeing a share price halving is never good, I am generally of the same opinion as my colleague Roland Head, that these are the kind of problems that are going to be fixed without any real long-term consequences. Unfortunately, I don’t necessarily think this means the stock is yet cheap enough to buy though.
Not over yet
Marks & Spencer has had the same problem lately with in-demand jeans, one reason for the recent exit of its clothing chief, and its CEO is urgently trying to resolve the issue. ASOS seems to be at a more advanced stage in solving its own supply problems, however.
The company admits that the warehouse problems are likely to continue for another month or so at least, which combined with the staggered nature of the profit warnings already, could easily mean we get some more bad news through to hit the stock. In addition, sales have been slowing, and while visits to its European website grew 17% in the last quarter, order growth increased just 11%.
Having said all that, my reason for caution is not because of its long-term prospects, but rather that we may see further short-term losses before a decent recovery starts to take hold. ASOS has a solid base in the UK, and despite the recent warehouse problems, there is no reason to think its US arm will not also garner ever-greater successes. Offering no dividend, and with a current P/E ratio of 35, the stock is not exactly cheap. Even with forward looking earnings moving this number below the 30 mark, I think the price has some way to go before making this stock a little more appealing.
That said, while the strong rates of growth seen previously may not exactly come about at the same levels again, the company should still benefit from the ongoing seismic shift away from bricks and mortar stores to online retail. Now might not quite be the right time, but I will keeping an eye on this one with the potential to buy.
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Karl has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019