ASOS shares: bull vs bear

Bullish: Alan Oscroft

ASOS (LSE: ASC) has had its share of ups and downs, for sure. That’s what you get when you’re pioneering a new sales and distribution model, especially on this kind of scale. But the current share price crash is a serious confidence shaker.

Brexit costs, increasing freight costs, other cost inflation, and additional headwinds have all conspired to take the shine off the latest set of full-year results. The company’s gross profit margin fell to 45.4% as an outcome. Oh, and CEO Nick Beighton is stepping down with no replacement in place, which is a bit of a shock.

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These heavy tidings, coupled with fears of a winter of crippling supply chain problems, sent the shares tumbling. They’re now down nearly 50% over the past 12 months.

But you know what that says to me? It says buy. I love it when a growth stock hits obstacles, and those who expect nothing but perfection dump their shares and run. It provides me with a buying opportunity.

ASOS shares are now on a trailing P/E ratio of about 19. Only a few years ago, they were up around 80. Yes, that was too high back then. And to be fair, it is a bit misleading, as the company expects lower pre-tax profit in the 2022 financial year. On current guidance, that could push the P/E to around 28.

But I’m convinced that’s still low, because I really think the long-term growth potential is still there. I already own Boohoo shares, but ASOS is now high on my buy list.

Alan Oscroft has no position in ASOS. Alan Oscroft owns shares of boohoo group.

Bearish: Rupert Hargreaves

ASOS was a first-mover in the online fashion space, but the firm seems to have struggled to capitalise on its position in the market. Its profit margins are half of peer Boohoo’s, and competitors are edging in on its turf.

Last year the company experienced a boom in sales, as people turned to online shopping during lockdowns. Unfortunately, ASOS has been unable to sustain this expansion.

Costs are increasing, and customers are returning to old shopping habits. These include shopping more offline and returning more products.

As a result, ASOS’s profit margins are under pressure as costs rise. As these pressures bite, the company recently warned that profits could fall as much as 40% next year.

Not only was this a disappointing update for investors, but the fashion giant also revealed that the chief executive, Nick Beighton, is stepping down after six years in the role.

These challenges leave the business in a difficult position. It faces intensifying pressure from competitors, rising costs, supply chain disruption, and now the company has lost its CEO. ASOS’s finance chief is now running the firm on a day-to-day basis.

Right now, the organisation needs an experienced CEO to steer the group through the above challenges.

Considering all of the above, I would not buy the stock for my portfolio today. Many of its challengers have a better outlook, with a more focused business model, which suggests they are better prepared for the hurdles ahead.

Rupert Hargreaves does not own shares in ASOS or Boohoo.

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The Motley Fool UK has recommended ASOS and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.