Shares in online fast fashion retailer ASOS (ASC:AIM) rallied 17% to £29.94 on Wednesday despite news of a two-thirds decline in full year profits.
Instead investors in the one-time AIM darling concentrated on relief that there was not another damaging profit warning and the company's confidence that it can, and will, fix the operational issues that have dogged the company for months.
ASOS’ shares were brought crashing back to earth following a string of profit warnings, over the past 10 months.
Yet the stock rallied today as chief executive Nick Beighton flagged a ‘solid start’ to full year 2020 amid ‘encouraging signs of recovery’ and expressed confidence in the ‘substantial global opportunity’ ahead for his charge.
PROFITS PUMMELED
Results for the year to 31 August were in line with downgraded expectations following ASOS’ most recent profit alert in the summer.
The figures revealed a 68% slump in full year pre-tax profits to £33.1m despite sales rising 13% to £2.7bn. This was in part due to ASOS' attempty to grow overseas too quickly, but also reflects the wider difficulties of the retail space, where intense competition led to hefty discounting that dragged on gross margins.
ASOS, which focuses on fashion-loving 20-somethings around the world, was primarily hurt by operational issues at its distribution centres in Berlin, Germany and Atlanta in the USA.
And while its sales growth has slowed and now pales in comparison to that of rival Boohoo (BOO:AIM), many a retailer would give their right arm to see sales growing in double digits across the UK, EU, US and Rest of World regions.
FEELING MORE POSITIVE
While the sharp drop in earnings and rise in net debt reported today are concerning, this is arguably old news and Beighton is confident operational issues can be fixed.
‘This financial year was a pivotal period for ASOS, where we have invested significantly and enhanced our global platform capability to drive our future growth,’ he explained.
‘Regrettably this was more disruptive than we originally anticipated. However, having identified the root causes of our operational issues, we have made substantial progress over the last few months in resolving them. Whilst there remains lots of work to be done to get the business back on track, we are now in a more positive position to start the new financial year.’
WHAT THE EXPERTS ARE SAYING
Russ Mould, investment director at AJ Bell, commented: ‘Plans to double the number of people in the business with “chief” in their title shows (ASOS) is serious about being better organised and having stronger leadership. Its announcement also contains lots of detail about how it will strip out costs and improve logistics, tech and other aspects of the business.
‘This all sounds very encouraging but the proof will be in the execution. ASOS has issued profit warnings, been punished by the market and is now going tail between its legs saying it will try harder. That’s given it some breathing space to get things back in order, but failure to drive profits back up, and at a decent pace, will mean shareholders won’t be so forgiving next time.’
READ MORE ABOUT ASOS HERE
Over at Peel Hunt, retail gurus John Stevenson and Jonathan Pritchard stuck with their ‘hold’ rating, although they noted ASOS is ‘showing signs of getting back on track’. Stevenson and Pritchard also argued ASOS ‘remains a relevant, global platform for young fashion’ and if execution issues have been resolved, ‘the shares offer good value’.
