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Why did the ASOS share price crash this week?

ASOS (LSE: ASC) shareholders have not had a good 2021. Over the past 12 months, the ASOS share price has crashed 50%. The decline has spread to rival Boohoo too, down 42% in the same period.

Interim results at the end of September kicked off the fall for Boohoo, despite the online fashion retailer recording record sales in the half. But a 5% dip in EBITDA, rising freight and logistics costs, plus an increase in planned capital expenditure put a chill on things.

Something similar has happened at ASOS, with full-year results doing the damage. The same kind of things showed up. Increased freight and Brexit costs combined with other factors to send the firm’s gross margin down to 45.4%. The bottom line showed a 25% pre-tax profit rise. But that wasn’t enough to overcome worries about escalating supply chain problems, which clearly shows in the ASOS share price.

Oh, and there was one other thing. ASOS chief executive Nick Beighton is leaving with immediate effect, and the search for a replacement is commencing. The company wants to shake up the board “to underpin delivery of the next phase of its global growth strategy.” There’s nothing wrong with that in itself. But for the CEO to depart with no succession plans in place? We investors can be a suspicious and cynical lot, I know. But the way this has happened isn’t encouraging.

Time to buy now?

Anyway, what will I do? I’ve been bullish about the prospects for ASOS and Boohoo for a long time (and I own Boohoo shares). I just wasn’t too keen on the companies’ valuations in the early days. There was too much of a ‘jam tomorrow’ feel in the elevated share prices, and not enough safety room.

But at today’s low prices? Well, ASOS might not have reported the growth that shareholders had hoped for this year. Diluted earnings per share came in flat at 125.5p (down to an increased number of shares in issue). That puts ASOS shares on a P/E multiple of only around 18, on Wednesday’s closing share price. It’s only a couple of years since ASOS commanded a P/E of 80.

ASOS share price valuation

ASOS expects lower pre-tax profit for 2022, between £110m and £140m. It’s all due to the cost headwinds already mentioned, plus capital expenditure, among other things. The mid-point of that range would represent a drop of 35% from the £193m recorded for 2021. Should EPS drop by the same proportion, we’d see a forward P/E of 28. Do I still think that’s an attractive valuation?

Well, I expect to see the ASOS share price remaining weak in the coming months, maybe for the full year. Growth investors can be tough masters. And when a stock like this hits a short-term reversal, it can take a lot to get it back on track. But I do think ASOS will recover and return to growth.

So yes, I’d buy ASOS. In fact, when it’s time for my next purchase I might do exactly that, even though I already hold Boohoo.

The post Why did the ASOS share price crash this week? appeared first on The Motley Fool UK.

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More reading

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The ASOS share price crashes again. Here’s what I’m doing now

Alan Oscroft owns shares of boohoo group. The Motley Fool UK has recommended ASOS and boohoo group. 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.

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