Is ASOS’ Driving Change agenda bearing fruit?

[MongiIG]

Fundamental analysis of the ASOS share price as its share price remains under pressure.

Source: Bloomberg

 

Price Revenue Sales Earnings before interest, taxes, depreciation and amortization Inventory Economics

 Axel Rudolph FSTA | Senior Financial Analyst, London | Publication date: Monday 17 July 2023 

Is ASOS’ Driving Change agenda bearing fruit?

Asos, faces obstacles in achieving its mid-term revenue target of £7 billion and a 4% Earnings Before Interest and Taxes (EBIT) margin by 2033. The growth in online sales has been slower than anticipated, and the outcomes of its Driving Change strategy remain uncertain. It called for a renewed commercial model, stronger order economics and a lighter cost profile as well as a robust and flexible balance sheet.

Nevertheless, there are encouraging signs of improved profitability and cash flow as the company concentrates on selling items at full price and effectively managing its inventory. However, a major hurdle lies in the company's ability to stimulate sales growth, which necessitates a shift in customer behaviour away from seeking discounts.

Asos intends to expand its partnerships, with the aim of these collaborations accounting for 5% of Gross Merchandise Volume (GMV) within the next 2-3 years and 25% in the long term. However, it is improbable that this distribution channel will significantly increase the EBIT margin to the targeted 8% due to the associated higher costs. 

At 36 times earnings, the shares actually trade right around their five-year average, after peaking at 68 times earnings. But with so much uncertainty around its plans and the growth of competitors like Vinted, investors may deem this too high a multiple given the risks around the outlook. 

ASOS analyst outlook

Source: Refinitiv

Refinitiv data shows a consensus analyst rating of ‘hold’ for ASOS – 4 strong buy, 2 buy, 18 hold and 4 sell - with the median of estimates suggesting a long-term price target of 500 pence for the share, roughly 46% higher than the current price (as of 17 July 2023).

Source: IG

IG sentiment data shows that 99% of clients with open positions on the share (as of 17 June 2023) expect the price to rise over the near term, while 3% of clients expect the price to fall whereas trading activity over this week shows 75% and this month 56% of buys.

ASOS – technical view

The swift decline in the ASOS share price following its March-to-early May range trading phase has taken it to levels last traded in October of 2009.

The company’s share price, which trades at -36% year-to-date, dropped by over 40% since May on disappointing half-year results and remains in a clearly defined downtrend.

ASOS Monthly Candlestick Chart

Source: Tradingview

Even though ASOS’s share price managed to so far stabilise above its June and current July lows at 323.00p to 322.90p, downside pressure may soon push it through those lows towards the July 2009 low at 306.8p and the psychological 300p mark.

For any kind of potentially bullish reversal to gain traction, the mid-May and June highs as well as the 55-day simple moving average (SMA) at 424.90p to 475.8p would need to be exceeded on a daily chart closing basis.

ASOS Daily Candlestick Chart

Source: Tradingview

Only then would the March-to-July downtrend line and December 2022 trough at 486.4p be back in sight.