Something very odd happened to the ASOS (LSE:ASC) share price when annual results hit the market on Wednesday.
A whopping gain of 28% in a single day. The largest one-day hike since 2004. It must have been stellar news then? Nope.
Profits crumbled by 68% year on year, down to £33.1m from £102.1m. Earnings per share were crushed by 70%, down from 98.9p to 29.4p, while the balance sheet is now weighed down by net debt of over £90m, compared to a net cash position of £42.7m in 2018.
Showing an impressive ability for understatement, CEO Nick Beighton said: “Clearly last year did not go as well as we planned.“
ASOS share price woes
When you see words like “disappointing” in a set of results, it’s usually a sign to get the hell out of there.
But check again today and the stock is up another 4%–6%, taking the trailing price-to-earnings (P/E) ratio over 110.
In fact, ASOS, which caters to fashion-conscious millennials, had an annus horribilis. Two successive profit warnings saw investors scatter to the winds, and in December 2018 alone the ASOS share price plunged by 40%. After-tax profits have been trending upwards every year since 2015, but £24.6m this time round, compared to £82.4m in 2018, represents a significant stall in momentum.
So what happened?
Well-publicised IT problems at its European distribution centre in Berlin meant severe delays in processing orders, while a new Atlanta warehouse that opened in February struggled to cope with demand and ran out of stock.
When you consider how important delivery-on-demand is for online-only retailers, you’ll know how much of a problem this is.
But it all comes down to expectations. We knew in July that pre-tax profits would be significantly under the £55m analysts predicted, and the market doesn’t mind that, in Beighton’s words, ASOS was “over-ambitious“. And the logistical struggles that caused such upset in the supply chain are now over and done with, Beighton claims.
While the market will take as a positive UK sales growth of 13%, backed by a 12% sales lift in Europe and a 9% boost over in the US, I think there are better options for investors looking to cash in on online-only retail.
I’d even go so far as to say that giant warehouse operators like Tritax BBOX — with 4.5% dividends and enviable customer lists — rather than the clients who fill them, are a better investment play given the circumstances.
BOO to a goose
ASOS doesn’t have the same cachet as its rival Boohoo (LSE:BOO), whose sales are increasing at a much faster rate. A 34% overall hike in the first half of the year was backed by another triple-digit sales surge from the NastyGal brand. In the six months to 31 August, pre-tax profits were up 83%.
BOO just keeps on smashing expectations. Another lift from a September interim update saw net cash grow to £207.4m, with revenues passing £1bn for the first time.
And while a P/E ratio of 65 is way, way out of bounds in normal times, the stock has grown 565% in the last 5 years. In 2007 a little company called Amazon had a similar P/E ratio. That’s not to say BOO can make billionaires of us all, but you get my point.
If you want in on the trend, there’s only one common-sense choice, in my opinion.