Something very odd happened to the ASOS (LSE:ASC) share price when annual results hit the market on Wednesday.
A whopping gain of 28% in a single day. The largest one-day hike since 2004. It must have been stellar news then? Nope.
Profits crumbled by 68% year on year, down to £33.1m from £102.1m. Earnings per share were crushed by 70%, down from 98.9p to 29.4p, while the balance sheet is now weighed down by net debt of over £90m, compared to a net cash position of £42.7m in 2018.
Showing an impressive ability for understatement, CEO Nick Beighton said: “Clearly last year did not go as well as we planned.“
ASOS share price woes
When you see words like “disappointing” in a set of results, it’s usually a sign to get the hell out of there.
But check again today and the stock is up another 4%–6%, taking the trailing price-to-earnings (P/E) ratio over 110.
In fact, ASOS, which caters to fashion-conscious millennials, had an annus horribilis. Two successive profit warnings saw investors scatter to the winds, and in December 2018 alone the ASOS share price plunged by 40%. After-tax profits have been trending upwards every year since 2015, but £24.6m this time round, compared to £82.4m in 2018, represents a significant stall in momentum.
So what happened?
Well-publicised IT problems at its European distribution centre in Berlin meant severe delays in processing orders, while a new Atlanta warehouse that opened in February struggled to cope with demand and ran out of stock.
When you consider how important delivery-on-demand is for online-only retailers, you’ll know how much of a problem this is.
But it all comes down to expectations. We knew in July that pre-tax profits would be significantly under the £55m analysts predicted, and the market doesn’t mind that, in Beighton’s words, ASOS was “over-ambitious“. And the logistical struggles that caused such upset in the supply chain are now over and done with, Beighton claims.
While the market will take as a positive UK sales growth of 13%, backed by a 12% sales lift in Europe and a 9% boost over in the US, I think there are better options for investors looking to cash in on online-only retail.
I’d even go so far as to say that giant warehouse operators like Tritax BBOX — with 4.5% dividends and enviable customer lists — rather than the clients who fill them, are a better investment play given the circumstances.
BOO to a goose
ASOS doesn’t have the same cachet as its rival Boohoo (LSE:BOO), whose sales are increasing at a much faster rate. A 34% overall hike in the first half of the year was backed by another triple-digit sales surge from the NastyGal brand. In the six months to 31 August, pre-tax profits were up 83%.
BOO just keeps on smashing expectations. Another lift from a September interim update saw net cash grow to £207.4m, with revenues passing £1bn for the first time.
And while a P/E ratio of 65 is way, way out of bounds in normal times, the stock has grown 565% in the last 5 years. In 2007 a little company called Amazon had a similar P/E ratio. That’s not to say BOO can make billionaires of us all, but you get my point.
If you want in on the trend, there’s only one common-sense choice, in my opinion.
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Tom Rodgers owns no shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. 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