UK shares have been battered over the past few days, as the Bank of England have raised interest rates once again. Inflationary pressures are also showing no signs of slowing down, leading to further downward pressure. One of the worst affected UK shares is ASOS (LSE: ASC), which has dipped around 85% in the past year. Thursday was a particularly bad day for the e-commerce company, with its share price falling over 30% in a single day. This is due to the firm cutting its FY2022 outlook. But this has left the fashion retailer looking very cheap…
The recent trading update
The Q3 trading update was very poor across the board. For example, total group revenues for the quarter sank £4m year-on-year to £983m. This was below expectations and demonstrates that post-pandemic revenue growth has entirely stopped.
Most worryingly, the company is also starting to feel the full impacts of inflationary pressures. Indeed, due to the rising cost of living, the return rates for ASOS products have soared. This is having very negative impacts on the firm’s profitability, and the group now expects adjusted profit before tax to total between £20m and £60m for the FY2022. This has fallen from previous expectations of around £125m, and far below the £193m recorded last year.
Gross margins also declined in the third quarter, due to factors such as elevated freight costs and sustained levels of promotional activity. This is another reason why profitability is far lower than expected for the fiscal year.
Why would I still buy this UK share?
Evidently, ASOS is severely struggling right now, and I cannot see any imminent improvements. Therefore, I am expecting significant amounts of volatility for the ASOS share price over the next year or so.
But as a long-term buy, I am still confident in the company. It has a customer base of nearly 27m, and when inflationary pressures die down, I believe that ASOS will feel the benefits of this, and consumers will return en masse.
In addition, I feel that there are international growth opportunities. For example, in the US, the group saw revenues increase 15% year-on-year in the third quarter. As international growth is an area where ASOS is targeting, it gives me hope for the future.
From a valuation perspective, the ASOS share price also seems far too cheap. For instance, it has a price-to-sales ratio of under 0.25, which is lower than the majority of all other UK shares. Further, based off least year’s earnings, it trades at a price-to-earnings ratio of 6.5. Although profits will be far lower this year, I still believe that they will recover. This means that I feel the ASOS share price is trading at bargain levels right now.
For this reason, I am very tempted to add some ASOS shares to my portfolio. I believe that, despite its blip this year, its long-term potential remains strong. As a long-term investor, this is what I look for.