Is ASOS surge to four-month high justified?

Currently AIM's third-largest company, our head of markets comments on ASOS's latest fightback.

The contrast with the full-year numbers this time last year is striking. Then, ASOS (LSE:ASC) was celebrating pre-tax profits growth of 28%, improving gross margins and early signs of encouragement with its international expansion ambitions. 

What followed was a year which the company would rather forget. The company had bitten off more than it could chew, and two profit warnings, outages at warehouses in Germany and the US not only revealed a deeper malaise but could even have brought the relevance of the brand into question. 

As the company saw nearly half its market value evaporate, it needed to take drastic action to stem the decline. As a result, the reported numbers are fairly dire. 

Pre-tax profit has plunged 68%, earnings per share 70% and gross margin also suffered a decline. ASOS has also swung into net debt, given elevated capex investment in its global platform and rising costs across various parts of the business.

Investors will be hoping that these numbers represent a line in the sand. The initial share price reaction to the results reflects a leap of faith, after management assurances that the latter part of the year was rather more positive, to the extent that it can look forward to the next period with confidence. 

Source: TradingView Past performance is not a guide to future performance

There are some glimmers which support this optimism – group revenues rose 13%, international retail revenues (which represent 63% of the total) improved by 11% and the company has not burdened itself with dividend payments, which has allowed historically for profits to be ploughed back into the business. 

Meanwhile, in admitting that it had taken its eye off the ball on the basics, ASOS has now pledged to reaffirm its focus on product, presentation and customer engagement.

Without question, ASOS has much to do to regain its former status as a market darling. The shares have lost 49% over the last year, as compared to a 14% decline for the wider FTSE AIM 100 index, and 34% in the last six months alone. 

Today's statement will repair some of that damage, but it is likely that investors will need to see several quarters of sustained and solid growth before being confident of a full recovery. In the meantime, the market consensus of the shares as a ‘hold’ will likely remain in place until material progress is confirmed.