Online retailers such as Asos [ASC.L] and Boohoo [BOO.L] were big beneficiaries of the rise in e-commerce during the Covid-19 pandemic, with sportswear, yoga gear and casual clothing in hot demand.
However, the Asos share price has seen its pandemic gains fizzle out. The stock wiped out the 42% annual gain it saw in 2020, after falling 50% throughout 2021.
As the company prepares to report its first-quarter results on 13 January, the Asos share price has fallen close to 60% in the past year to close at 2,141p on 10 January – the stock is down 63% since hitting a 52-week high of 5,918p on 23 March 2021.
Asos share price wipes pandemic gains
The shift in sentiment follows the company issuing a profit warning, and the sudden departure of its CEO Nick Beighton – which was announced on the FY 2021 earnings call on 11 October – has contributed to a fall in the Asos share price.
In the first half of FY 2021 – the six months to the end of February – Asos' reported profit increased by 275% year-on-year to £112.9m. In its earnings presentation, the company said that this figure excluded a “Covid tailwind” profit of £48.5m. Sales for the six months to the end of February were up 24% to £1.97bn.
Total sales for the full year were £3.911bn, up 22% from FY 2020 and implying £1.93bn for the six months to the end of August. Total gross profit for the 12 months was £193.6m, up 36% from 2020 and implying a profit of £80.7m for the second half of the year.
While sales have been healthy, there is expected to be a significant decline in profit growth to come. Asos has warned that higher logistics costs and supply chain disruptions could lead to profits for FY 2022 falling by 40% year-on-year. It's also noted that the new £90m Lichfield warehouse, which opened last November, will be a “cost drag”.
Thinning growth
Asos could announce a new CEO in its Q1 update – or at least provide an update. This could give the share price a much-needed boost.
However, according to Hargreaves Lansdown analysts, investors should be keeping an eye on the underlying operating margin for the quarter. Although it rose from 4.6% in full-year 2020 to 5.3% in 2021, Hargreaves Lansdown analysts believe “5.3% is a bit thin, which doesn’t leave a lot of breathing room”.
Sales figures are also worth looking out for. Asos is expecting sales growth for the first half of 2022 to slow sharply to mid-single digits, and between 10% and 15% for the full fiscal year. Our chief market analyst, Michael Hewson, says the low forecasts help to “explain why the shares have fallen as much as they have, even allowing for the fact that revenues for the full year are expected to come in at a record £4.36bn”.
Bumpy ride
Beyond the Q1 2022 earnings update, there could be a bumpy ride ahead for the Asos share price. The company is targeting an operating margin of 4% or higher in the medium term and at least 8% over the longer term, according to its FY 2021 report.
The company is hoping to achieve annualised sales of £7bn over the next three to four years. According to Matt Dunn, CFO of Asos, the aim is to double the company’s US and European businesses and add £1bn in annual own-brand sales.
Analysts at Berenberg believe that the impact of Covid-19 has clouded the outlook for the stock. In a note to clients seen by ShareCast, the analysts argued that Asos is in a position to accelerate its long-term growth. If it’s able to achieve its targets of a 4% underlying operating margin and £7bn in sales, then there is a “likely significant upside”.
Although analysts at the firm cut their target for the Asos share price from 6,500p to 5,500p in October, this still implies an upside of 156% from its 10 January close.
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