ASOS: after two profits warnings, is it set to bounce back?

ASOS investors are expected to cheer surging revenue as the online retailer looks to bounce back from a string of profit warnings when it posts its year-end figures next week.

Investors in the online young fashion giant have had a reality check over the past 12 months, watching shares slide by more than 50%. At the time of writing (Friday 11 October 2019) shares were priced at £24.30 compared to £60.60 a year ago. 

The AIM-listed company plunged in value after it warned on profits in December 2018 and again July 2019, as it failed to live up to lofty expectations.

Last December it admitted it hadn't made the most of the Black Friday trading period with customers unimpressed with its offers, and in July it said that it was still being hampered by operational issues related to the onboarding of new warehouses in Germany and the US.

A further drop in its share price meant that its smaller rival Boohoo had overtaken ASOS in terms of market capitalisation. While ASOS has had its travails Boohoo has motored ahead. Last month Boohoo revealed that its interim revenues were up 43% and its full-year sales had exceeded £1bn for the first time.

While they are not expecting percentage sales growth to be quite that high at ASOS, analysts are expecting double-figure growth in its full-year results announcement on Wednesday 16 October.

Analysts have forecast that the business will report a 12% jump in revenues to £2.7 billion for the year to August. For the new financial year, analysts are forecasting a further 15% sales growth to reach £3.1 billion for the year.

ASOS itself has forecast that it will post a pre-tax profit of between £30 million and £35 million, after around £50 million in restructuring and transition costs. This is a significant decline on profits from last year, when it delivered a pre-tax profit of £102 million.

However ASOS warned this would be the case in July after it said it had struggled in getting its Berlin and Atalanta warehouse up to full speed.

The company has also said profits have been impacted by substantial investments in IT, operational issues at warehouses in the US and UK, stock availability problems and the impact of economic uncertainty on consumer confidence.

While positive about the topline growth, analysts say they will be looking for reassurance the the operational issues have been dealt with and will not hamper its financial performance moving forward, particularly we retail heads into the crucial Black Friday and pre-Christmas trading period.

Greg Lawless, analyst at Shore Capital, said: “Following two profit warnings full-year 2019 has been a difficult year for the company with operational issues causing a collapse in the operating margin.

“In our view, management must rebuild credibility in its financial guidance and show a clear path that it can recover operating margins over the medium term.

“In our view, there is no guarantee that the operational issues that the company has encountered in both Berlin and Atlanta will be fully resolved ahead of peak trading.”