Online fashion retailer ASOS (LSE: ASC) only joined the London Stock Exchange‘s main market last year. And it was quite a year to forget, as ASOS shares lost 78% of their value.
This latest drop now means the stock is down a staggering 92% in five years. What’s gone wrong here? And is this a buying opportunity for me today?
A crashing wave
Just two years ago, ASOS was riding the e-commerce wave caused by the pandemic. Consumers were forced to shop online while bricks-and-mortar retailers had mandatory ‘closed’ signs hung up.
In the six months to the end of February 2021, sales climbed 24% year on year to just under £2bn. Meanwhile, profits skyrocketed 253% over the same period to £106.4m. The company even raised £500m to fund its global expansion plans. Things were looking rosy.
Since then, the fast-fashion outfit has run into an enormous amount of difficulties. Firstly, the pandemic tailwinds have all but disappeared as people have been able to revisit physical stores again. Supply chain disruption from lockdowns and the subsequent war in Ukraine have resulted in much higher input costs too.
And rising inflation and the cost-of-living crisis have impacted the purchasing power of its consumer base (mainly young people). For the year to 31 August 2022, the group reported an operating loss of almost £10m compared to an operating profit of £190m for the previous year.
Needless to say, that’s a worrying reversal of fortune.
Of course, many of these issues aren’t unique to ASOS. Fast-fashion rival boohoo and many other retailers face the same problems. But there are more company-specific red flags here.
Firstly, the CEO left with immediate effect in late 2021. And since June last year, the firm has been under the leadership of new CEO José Antonio Ramos Calamonte. He was appointed to turn around the company and “re-engage its younger consumer base”.
I think this admission of the need to rekindle the brand’s appeal to its younger consumers is worrying. It suggests that the company is struggling in the face of immense competition from Chinese digital retailer Shein, which became the most-downloaded app in the US last year and is hugely popular in Britain too.
Meanwhile, management is discussing whether to hire a restructuring expert following the departure of its chief financial officer. Basically, it seems the business model and future of ASOS is in complete flux at this point.
Will I buy the stock?
Of course, it’s possible that new management could spark a turnaround at the company. CEO Calamonte has been honest about the difficulties the business is facing, so I wouldn’t totally rule out a comeback.
However, one of his key proposals is to reduce markdowns and promotions. I think this could have a negative effect and knock sales even further. That’s because ASOS’s customers might have become too accustomed to the brand’s low prices over many years. They may baulk at higher prices, especially with the rising cost of living. And especially with Shein just one click away.
Billionaire Mike Ashley’s Frasers Group has built a 5% stake in the company. I wouldn’t be surprised to see a takeover bid develop. However, the shares are far too risky for me to buy right now.
Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Boohoo Group Plc. 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 2023