ASOS: Stock of the Week

VIDEO: ASOS' share price is struggling, but is it a buy? Morningstar's Jelena Sokolova has looked at the earnings report

Sunniva Kolostyak 2 November, 2023 | 11:27AM
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Sunniva Kolostyak: We had to wait an extra week for ASOS (ASC), our stock of the week, to reveal their earnings report. And yesterday, they showed quite significant losses. So, for this week's stock of the week, I'm joined by Jelena Sokolova, our senior analyst covering ASOS.

Jelena, thanks for being here. You've looked at the earnings – revenue is down, the share price fell. What's going on?

Jelena Sokolova: Yeah. So, as results and share price reactions suggest, the situation is still quite bleak. So, adjusted revenue is down 11%. And also, outlook was quite disappointing with still 5% to 15% expected revenue declines for the next year. That was quite badly taken by the market and also a disappointment for us.

Kolostyak: So, ASOS is one of the most undervalued stocks in Morningstar's coverage. And upon these earnings, you adjusted the fair value estimate to about £13. The stock is trading at about £3, £4 at the moment. What makes you believe that it has room to grow?

Sokolova: Yeah. So, currently, the company is going through troubles, obviously, but I think, there is still potential with increased online penetration for European apparel overall. The stock is trading on absolute levels quite cheaply at 0.3 times revenue. So that suggests continued weakness and declines. And something that we don't factor in, but maybe also of consideration for investors that it could become an acquisition target with, for instance, SHEIN being quite active on that front. It's not something that we factor into our forecasts, but that's sort of an additional thing to mention about ASOS.

Kolostyak: So, back to the report then. Was it very bleak altogether or were there any bright spots to kind of highlight for investors who are maybe a little bit more worried?

Sokolova: Yeah. So, on the good side, they are taking some action to improve the situation. So, currently, the results are not showing yet in their revenue and profits. However, on the inventory side, the inventory has declined by around 30%. An improvement of supply chain is upcoming, and we see some indications of improving results here. Another thing that I would like to mention that they are focusing on their more profitable orders and that kind of hits the revenue growth, but it is good for profitability. And finally, we're also concerned that decreased marketing spending would hurt the online penetration and online growth going forward from all these firms. However, we are encouraged also yesterday that they mentioned that they will increase their marketing budgets going forward to attract new customers to this improved supply chain value proposition. The only thing is that the results are still not there. So, I guess, the market needs to see some evidence of this actually paying off.

Kolostyak: Well, Jelena, thank you very much for coming to the studio and giving your summary. For Morningstar, I'm Sunniva Kolostyak.

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Sunniva Kolostyak

Sunniva Kolostyak  is data journalist for

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