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When will ASOS shares bounce back?

The online fashion retailer made a loss in the first-half and sees tough trading on the horizon

ASOS made a loss of £15.8m in the first-half of 2022, after unveiling a £106m profit in the same period last year. The fashion retailer posted an operating loss of £4.4m for the period and £30m of ‘adjusted items’ relating to Covid-19 and financing costs saw it enter the red. Adjusted pre-tax profits came in at £14.8m (£112.9m in 2021).

Covid-19 restrictions and widespread supply-chain difficulties within the industry affected stock availability. The gross margin also dipped by 190 basis points due to increased freight costs and product discounting. However, at constant currency rates, revenues grew by 4% year-on-year and management says that stock availability has improved for the second-half of 2022.

"ASOS has delivered an encouraging trading performance, against the continuing backdrop of significant volatility and disruption,” said COO and CFO Mat Dunn.

"… We've entered the second half of the year well placed, and believe that our stock position, with increased product availability and newness, will stand us in good stead.

"We remain mindful of the potential impact on demand from the growing pressures on consumer spend and will continue to be responsive to any changes in market conditions as we progress the work started in the first half to deliver on our ambitions."

ASOS takes hit from Russian exit

ASOS exited Russia during the period following Putin’s invasion of the Ukraine and says it will see a £14m reduction in group profits. The territory accounted for 4% of ASOS’ total revenue and £20m in profits.

Besides adjusting for the exit from the Russian market, the retailer has left full-year profit guidance unchanged for now. The company says the bulk of its profits are earned in the second-half of the year.

In the UK market ASOS picked up an additional 1 million customers year-on-year, attracting 300,000 in the first-half. Revenues grew just 1% in Europe, which was adversely affected by supply chain issues, but 11% in the US.

The retailer’s shares rose 5% on Tuesday but dipped by 9% on Wednesday. The shares have lost 70% of their value in the past year.

Retailer warns of riskier trading conditions

Like other retailers such as Tesco, ASOS also warned that trading conditions have worsened in the second-half of the year. The company says that “an increasingly challenging external environment” means that there is “a greater degree of risk than normal.”

The inflationary environment is the big unknown for ASOS, which has already experienced higher warehouse wage, freight and delivery costs. The company admits that the likely impact on customers’ “discretionary spend… is yet to be felt”.

Nevertheless, ASOS made £50m of cost efficiencies during the period and managed to introduce low to mid-single digit percentage price increases across its own and partner brands. The introduction of Topshop brands has also been a success. The company continues to hunt for a new chief executive following former CEO Nick Beighton’s departure last year.

Analysts at Barclays cut their price target on the shares to 2,125p from 2,280p. Meanwhile, Sherri Malek, analyst at RBC Capital Markets, called the figures “underwhelming,” and expressed concerns over consumer confidence. However, she also said that the potential for international expansion was encouraging.

It’s hard to believe that back in February 2018 ASOS shares hit 7452p. At 1468p – down 80% since then – the shares are a speculative long-term buy. But, with the cost of living crisis biting, in the near term things could get worse before they get better.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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