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Will this battered UK stock make a strong recovery?

Young black woman using a mobile phone in a transport facility
Young black woman using a mobile phone in a transport facility

UK stock ASOS (LSE: ASC) has seen a huge crash this year. Currently trading at 650p, the fashion and beauty retailer has fallen out of fashion with a 75% decrease in its share price in the last 12 months.

Investors were shaken by the FY21 report with a £208m plunge in net cash and 2% dip in gross margin. An exit from the Russian market in March, creating an estimated £14m fall in profits, and the long-term retreat of the pandemic’s online spending boom, have both added to the falling share price since.

Yet a 22% rebound in the last month suggests sentiment is turning. Indeed, new CEO José Antonio Ramos Calamonte is pushing an ambitious remodelling of acquisition and operational strategies. With its FY23 optimism, I’m keen to examine whether this UK stock can make a strong recovery

Premier loyalty

One key aspect of the FY23 strategy is a renewal of the company’s acquisition model and an increased focus on customer bases and loyalty through the Premier programme.

The firm’s overseas figures are lagging domestic levels. US and European revenues for this year totalled £1,701m — 5% lower than the UK’s revenue of £1,763m. Yet management has been successfully closing this gap through the Premier loyalty programme.

Its latest report boasted a 19% increase in US Premier customers. Management also thanked increases in UK Premier customers for offsetting the impact of the cost-of-living crisis. Indeed, the company achieved 7% growth in UK revenues, despite expected decreases in domestic sales driven by squeezed incomes.

An intensified focus on the Premier programme within the FY23 strategy should hopefully help drive overseas operations closer to domestic levels, and that would continue to offset the economic issues within the UK throughout next year.

A 2% rise in the global customer base suggests ASOS hasn’t won as many new customers as, say, rival Zalando, this year. But the retailer has faced a rough macroeconomic climate: huge inflation, rising costs of living, and an increasing return to bricks-and-mortar spending. Considering this, I find this small increase more acceptable and am upbeat about the FY23 outlook.

Inflating operations

One huge concern is inflation. This has led to a new efficiency drive as part of the FY23 strategy. But are its goals achievable?

This year saw an additional £162m in operational expenditure — largely driven by increased freight and delivery costs. Operational costs consumed 44.4% of sales revenue, up 3.8% against last year. Calamonte has begun cutting costs through increased supply chain controls. And ‘test and react’ strategy aims to reduce stock held and markdowns through more flexible sourcing.

Yet the company still estimates FY23 cash flow of between -£100m and zero for the first half of the year. This doesn’t alarm me. A £50m increase in its credit facility enables management to access a total £400m from the bank until early FY24. With plenty of funding available, I think Calamonte should be able to deliver the revamp necessary to combat inflation.

ASOS has no easy path ahead. But this doesn’t necessarily mean the retailer will fall out of fashion. With a fresh approach to customer acquisition and its operating model, a slow recovery (but maybe not a strong one) throughout FY23 is possible. I’m looking to add ASOS shares to my portfolio.

The post Will this battered UK stock make a strong recovery? appeared first on The Motley Fool UK.

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Hamish Cassidy has no position in any of the shares mentioned. The Motley Fool UK 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 2022