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Will slowing sales growth hold ASOS shares back?

ASOS share price: ASOS website on mobile device

Asos [ASC] has struggled amid the reopening of the global economy, as the coronavirus pandemic-spurred shift to e-commerce sees a slowdown in demand, as revealed in the fashion retailer’s previous earnings release. 

The company had ridden the e-commerce boom to post a 275% profit rise of £112.9m in the first six months of fiscal year 2021, but by the end of the trading year, profit had only grown 36% to £193.6m from 2020. 

Revenue was up 24% in the first half of 2021, but this slowed to 20% for the full 12 months. When the company released a trading update in January, it showed that growth for the first four months of the year was up just 5%. As a result of the slowdown, revenue guidance for the full year is between 10% and 15%.

Despite challenging market conditions including supply chain constraints that have resulted in higher delivery, air freight and labour costs, Mat Dunn, COO and CFO of Asos, noted in the trading update that the figures were in line with guidance. While these bottlenecks should ease, profits for the upcoming interim results announcement on 12 April are expected to take a hit as a result, the company stressed. 

Asos lists on the LSE

Asos also used the trading update to announce that it would be delisting from the Alternative Investment Market (AIM) and moving the stock to the London Stock Exchange’s main market. Although the listing saw a 0.7% rise in share price, sentiment around the stock has been weak since it debuted on 22 February. 

As of 7 April, the Asos share price was down nearly 6% in the last month and had fallen 33.5% since the start of 2022. The stock was trading 5.8% above its 52-week low of 1,502p, which it reached during intraday trading on 7 March. 

In a research note, Hargreaves Lansdown analysts said the move to the main market was a development that investors should keep an eye on. “That could bode well from an investment perspective because it means the shares are more likely to be included in fund purchases for index trackers which aim to mirror the performance of the UK's biggest companies,” they wrote. 

Russia and Ukraine sales suspended 

Investors will be keen to get a clearer picture from the first-half results of how Asos’ revenue growth and profit is shaping up in the second half of the year.

A slightly concerning factor was the profit warning issued by the company in early March following its decision to suspend sales in Russia and Ukraine. The two countries accounted for 4% of group revenue in fiscal year 2021 and accounted for £20m of its profit.

“The ongoing crisis in Ukraine is going to have an effect on full-year profits. The extent of this will depend on how long sales suspensions remain in place. Neither Ukraine nor Russia is a core market for Asos, so from a purely operational perspective the picture hasn't changed too much,” the Hargreaves Lansdown analysts noted.

Beighton’s successor yet to be announced 

Asos’ upcoming earnings call could also provide further detail on former CEO Nick Beighton’s successor. Rumours have circulated that it will be former Farfetch [FTCH] COO, Andrew Robb. 

Beighton and former chairman Adam Crozier resigned as part of a management shake-up back in November 2021. According to an interview Crozier gave to Bloomberg at the time, the company needed a “fresh pair of eyes”.

“There is never a good time to make a change like this… But we have stability in the core business and a really strong balance sheet now, which is something that previously we lacked and which shareholders in the market used to refer to often,” he added. 

The announcement of a successor wouldn’t necessarily boost the Asos share price in the immediate term, but it may be buoyed once a new leader sets out their vision for the company. A dynamic business strategy will also be crucial to keeping investor sentiment buoyed in the short-term, particularly as the cost of living increases amid rising inflation. 

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