The ASOS (LSE: ASC) share price fell off a cliff on Monday as investors gave latest financials a frosty reception. The UK retail share continued to haemorrhage value on Tuesday too. At £22.69 per share, ASOS’ share price touched its cheapest for 18 months yesterday.
Does this represent a terrific dip buying opportunity for long-term investors? Or should I give ASOS shares short shrift?
Profits predicted to dive
To recap, ASOS shocked the market with a profit warning on Monday as it tipped markedly-weaker sales growth this year. The online retailer has predicted revenues growth of between 10% and 15%, reflecting supply chain problems and strong comparables. This is potentially half as good as the 20% rise it recorded in fiscal 2021.
Moderating sales growth isn’t the only problem it has to face. ASOS saw gross margins slip 2% last year to 45.4% as freight and Brexit-related duty costs, an unfavourable product mix, currency-related headwinds and increased customer investment all weighed.
ASOS warned that supply chain problems will persist in the first half of this new financial year as well. And with higher labour costs and delivery expenses entering the equation, it warned pre-tax profits will range between £110m and £140m for the full year. ASOS reported adjusted profit of £193.6m.
Beighton bids farewell
As if that wasn’t enough to give investors the heebie jeebies, ASOS also announced long-serving chief executive Nick Beighton will be leaving the company. No reason was given for the exit, and the departure of the man who has overseen ASOS’s stratospheric rise at this critical time is particularly unfortunate.
The premium valuation that ASOS’s share price has long commanded has been chopped down in the past couple of days. Its collapse means the retailer now trades on a forward P/E ratio of 16 times, below its pre-crash reading nearer 20 times.
Long-term investors could argue that this dip presents a great opportunity to buy in. ASOS is, of course, a major player in the e-commerce arena, a market which is tipped for continued strong growth through this decade.
Acquisition action over the past year has seen it hoover up some of the UK’s most beloved fashion brands like Topshop and Miss Selfridge. It’s tipped to continue building its global distribution network to facilitate future earnings growth too.
Will ASOS’s share price keep falling?
That said, the risks to the share price appear to be growing. It’s not just the possibility that labour and freight costs will continue to soar. The e-commerce boom means that the digital retailer faces intensifying competition as other businesses have invested heavily in their own online operations since the Covid-19 outbreak.
Furthermore, fashion specialists like this could see demand for their goods slump as environmental concerns cause shoppers to scale back spending on their wardrobes.
I still think the retailer’s investment case looks pretty robust. But I think the ASOS share price could continue to fall in the short to medium term. I’m happy to wait to see if the retailer falls further before investing in the business.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. 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.
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