Asos: Why has the share price crashed?

Shares in Asos (LSE: ASC), the online ‘fast fashion’ retailer have crashed 30% today.

As I write, the shares are trading at £30.89, down from £71 in March.

So what’s gone wrong at Asos? And is it worth buying shares at the current price?

Profit warning

Asos warned this morning that profits would be lower this year than previously expected. The operating margin will be 4.5% rather that 6.5%, and that means that pre-tax profits will probably come in at around £45m this year rather than £65m.

Asos blames the fall in profits on the rising pound. That’s meant prices have had to go up in overseas markets such as Russia and Australia.

No doubt there’s some truth in that, but I can’t help wondering if Asos has grown too far, too fast. It’s still relying on one warehouse in Yorkshire, and it’s going to have to invest more in infrastructure if it’s going to keep growing sales at the super-fast rates of recent years. (Sales went up by 40% last year, 60% the year before.)

One analyst, Freddie George at Cantor Fitzgerald, seems to be thinking along similar lines. He was quoted in The Times saying: “We remain concerned that the ranges in womenswear have been expanded beyond the levels management can adequately control. Hence, we believe the company has seen significantly higher levels of markdown activity in womenswear and higher returns.”

No surprise

I don’t doubt that Asos is a great business. To start at nothing in 2000 and get to the stage where sales are getting close to £1bn a year is very impressive. I know that Asos is much loved in its target market of younger fashionistas, and its customer service is great.

But really, today’s news shouldn’t have been a huge surprise.  Firstly, retail is an area where profit warnings are fairly common. And secondly, Asos has been ridiculously overvalued by the market – earlier this year the price/earnings ratio was over 120.

If a company is trading on such a high valuation, if it’s seen as a sexy super-growth stock, it’s very vulnerable if the slightest thing goes wrong. And that’s what has happened with Asos today.

It’s also worth noting that the Asos CEO, Nick Robertson, sold shares worth £80m last October at £50 a share. I’m not saying that Robertson did anything wrong. His sale was well within the rules. But such a large sale was another strong signal that Asos shares were too expensive.

What about now?

After today’s fall, is it worth investing in Asos now?

Well, I don’t think so. Even now, Asos is still on a price/earnings ratio of 57. That’s very steep.

Don’t forget, that today’s warning is actually the second piece of bad news from Asos this year – the company revealed in March that UK sales had grown more slowly than expected. This feels like a situation where we’ll see further growing pains and at least one more piece of bad news before too long.

But I will keep an eye on Asos. At some point, it might become an attractive growth play.