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ASOS shares just crashed 23%. Here’s what I’d do now

Edward Sheldon, CFA
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Yesterday, ASOS (LSE: ASC) shares fell a whopping 23% to 2,107p, their lowest level since December. The reason the share price fell so far was that the online retailer issued another profit warning – its second in seven months. Revising its guidance for FY2019, ASOS reduced its pre-tax profit forecast to £30m-£35m, down from its previous estimate of £55m.

So, what’s the best move now? Are ASOS shares worth buying after the significant share price fall, or should they be avoided?

Short-term problems

Looking at the details of yesterday’s profit warning, ASOS’s problems appear to be short-term in nature, to my mind. For example, the retailer advised that its performance in the EU and the US was held back by operational issues associated with its transformational warehouse programmes. Overhauling its infrastructure and technology in its US and European warehouses has taken longer than it had anticipated which has caused disruptions.

These issues are certainly fixable. ASOS said that it has identified the root causes of the challenges and that it is making progress in resolving them.

Long-term growth story

Importantly, the long-term growth story still appears to be intact. Yes, sales have slowed, but they are still expanding at a healthy clip. Yesterday’s update showed that for the four months to the end of June, total group sales rose 12% while UK sales rose 16%. That’s a solid effort given Brexit uncertainty. Most retailers would kill for that kind of growth.

There were other positive takeaways from yesterday’s update too. For example, total orders placed rose 14% year-on-year and site visits were up 16% year-on-year, while the business hit 20m active customers globally for the first time.

I’ll point out that the potential for international growth remains significant. According to my research, the largest online clothing retailer in the US is currently department store Macy’s. Spend two minutes on the Macy’s website and you’ll find that ASOS is in an entirely different league. So, I think there’s plenty of growth ahead. 

I’m cautiously optimistic

Weighing up the short-term problems versus the long-term growth story, I’m cautiously optimistic about the outlook for ASOS shares after yesterday’s share price fall.

In my view, the service that ASOS offers is second to none. Its range of clothing is phenomenal, the user experience is brilliant, and its delivery and return processes are extremely efficient. I’ve been shopping with ASOS for over a decade now and I’ve never been let down. I see the current operational issues as a short-term blip.

I also like the fact that Chairman Adam Crozier bought 4,200 shares yesterday. This purchase more than doubled his holding. That suggests the insider believes the shares will rebound.

ASOS shares still aren’t cheap, even after yesterday’s share price fall. Before yesterday’s profit warning, the consensus earnings estimate was 82p per share for FY2020. My colleague Roland Head believes a figure of 75p is more appropriate. Using his earnings forecast, the forward-looking P/E is 28. That’s a lofty valuation, but I think it’s reasonable for ASOS, given its growth potential.

Of course, this is not the kind of stock I’d bet the house on. It’s a highly volatile stock and it pays no dividend. But at 2,100p, I believe the risk-reward proposition is attractive. I think a small position in the company could pay off over the long term.

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Edward Sheldon owns shares in ASOS. 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