For two years, ASOS (LSE:ASC) was the rising star of the AIM stock exchange as its share price enjoyed a meteoric climb from February 2016 to March 2018.
It was one of the first companies to capitalise on online fashion sales and established itself as the place to shop for young people who wanted to be seen looking good.
Unfortunately, 2019 has been a difficult year for the company as it revealed an 87% drop in pre-tax profits for the six-month period to 28 February, compared with the same period in 2018.
Fall from grace
So, if you’d purchased £1k of shares in ASOS three years ago, what would they be worth today?
If you’d bought them at £48 a share on 17 December 2016, then you’d be down over 35%, as today they are worth around £31 a share. Your £1k investment of approximately 21 ASOS shares would be worth around £650 today.
A few factors caused the ASOS share price decline. Increased competition online led the retailer to cut prices to match competitors but failed miserably. It then ran into inventory problems amid a warehouse overhaul which left it unable to meet stock demands. Changes to its marketing plan backfired, adversely affecting its search engine rankings and reducing visits to its websites. In October it released its annual trading update, which was again disappointing but hopeful; in the year to 31 August profits fell 68% but sales increased 13% and over 72m orders were placed with the company.
I think the long-term outlook for ASOS is improving and I see a brighter future for ASOS ahead. Unlike most AIM-listed companies, ASOS is well established. It has overhauled its infrastructure and technology in its US and European warehouses and having now sorted out its inventory troubles, it appears to be ready to meet customer demands.
Amid the Brexit doom and gloom overshadowing every aspect of British business, ASOS increased its UK sales. It recently hired a chief growth officer, the first of its kind in retail, so hopes are high that this role will bring further growth to the brand.
It has plenty of scope to further expand internationally and, with the global apparel market expected to grow to $1.5tn in 2020, it’s well placed to do so.
In response to the climate crisis and global desire to promote a circular economy for plastics, ASOS is getting on board with sustainability. The fast-fashion company already uses mailbags that are 100% recyclable and made from 25% recycled material. ASOS has also committed to eliminating unnecessary plastic packaging by 2025 by signing the Ellen MacArthur Foundation’s New Plastics Economy Global Commitment.
Back in July, I said to “Forget ASOS.” I’m inclined to think it can bounce back eventually, but I think its current share price is still too high. It has a price-to-earnings ratio of 31 and no dividend to sweeten the deal for shareholders. If you’re a shareholder sitting on a loss, I think holding is the wise thing to do, otherwise, I would continue to avoid it for now.
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Kirsteen 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