ASOS Shares Soar 10% Following Full Year Update. Time To Buy?

The ASOS share price remains highly volatile following the release of full-year financials.

The fast-fashion retailer was last 10% higher in Wednesday business, at 538p per share. This follows heavy reversals earlier in the week.

Today ASOS reported a pre-tax loss of £31.9 million for the 12 months to August. It reported corresponding profits of £177.1 million a year earlier.

Group revenues rose 1% year on year to £3.94 billion. However ASOS suffered a large drop in margins on the back of soaring costs.

Gross margins slump 180 basis points in financial 2022, to 43.6%.

Volatility Tipped To Continue

ASOS said that trading has remained “volatile” since the beginning of the new fiscal year in September.

It went on to say that “significant volatility in the macroeconomic environment” means that “it is difficult to predict consumer demand patterns for the upcoming year.”

The business did warn, however, that it expects to record a loss in the first half. It said that this would be caused by “usual profit phasing” as well as “[an] elevated markdown to clear stock resulting from the change in commercial model.”

ASOS expects a stock write-off of between £100 million and £130 million for financial 2023.

Turnaround Plan

Today ASOS chief executive José Antonio Ramos Calamonte announced plans for “a clear change agenda to strengthen ASOS over the next 12 months and reorient our business towards the future.”

He said that planned changes to its operating model would comprise “a number of decisive, short-term operational measures to simplify the business.”

These would come “alongside steps to unlock longer-term sustainable growth by improving our speed to market, reinforcing our focus on fashion, strengthening our top team and leveraging data and digital developments to better engage customers,” he added.

Plans include adopting a shorter buying cycle with improved speed to market, steps it says will enable “a more relevant and better curated customer offer.”

ASOS also plans to reduce and simplify its cost base, boost the balance sheet and improve its performance in overseas markets (and especially the US).

Beefing Up The Balance Sheet

The ASOS share price has collapsed 78% in 2022 as revenues have slumped, supply chain issues worsened and costs soared.

Sales at the e-retailer have been battered by increased competition and the impact of the cost-of-living crisis. Indeed, the level of returns has spiked as shoppers keep a tight leash on discretionary spending.

The business has also racked up an enormous amount of debt. It swung from having net cash of £199.5 million in financial 2021 to record a net debt of £152.9 million last year.

In more positive news today, ASOS also announced a £650 million banking facility to give it “financial flexibility” to navigate the uncertain economic backdrop.

Shares in the business slumped on Monday after it announced talks with lenders to amend its revolving credit facility.

Here’s What I’m Doing Now

Wednesday’s share price jump indicates a positive reception to ASOS’ turnaround strategy and the news of that £650 million bank facility.

However, I’m not prepared to buy the battered retailer’s shares today. Rising freight, energy and product costs look set to remain a big problem for the company.

At the same time the company’s revenues picture outlook remains gloomy as consumer spending power sinks.

In the UK, latest retail sales data from the BDO showed like-for-like sales rise just 2.2% in September. This was the slowest rate of growth since the mass re-opening of physical retail last year.

ASOS will likely have to continue aggressively discounting to stop sales falling off a cliff, putting extra pressure on its troubled margins.

I’m also worried about the state of the company’s rapidly weakening balance sheet.

Today it announced plans to reduce capital expenditure this year given the tough trading environment. ASOS now plans to spend between £175 million and £200 million, down from a previous target of between £200 million to £250 million.

But I worry that these steps — along with the additional banking facility it announced today — represent nothing more than a sticking plaster. I think ASOS is far too risky to invest in right now.