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In the first operations on September 26, the ASOS (LSE:ASC) share price rose 1%. This might surprise some, given the release of a trading update for the period until early September.
With total group revenue down 12% compared to the same period last year, some might classify this as a poor set of results. However, here’s why there’s more to it than that.
The brief backstory
For those who don’t follow ASOS as closely, the business has struggled since we emerged from the pandemic. The stock is down 36% over the past year, reflecting the move from an after-tax profit in 2021 to a loss in 2022.
A lot of pessimism has been built into the brand’s expectations, even though the management team is working hard to reduce costs and restructure the company.
It is true that falling income is not a good sign. It shows that demand is falling. In a very price-competitive segment of the fashion industry, ASOS needs top-line growth to survive.
Looking beyond the headline figure
One of the main reasons for the positive reaction in the stock price initially is due to the optimistic comments. For example, even with a lower revenue figure, you expect the final quarter to be profitable. This is due to cost savings and cuts made in the business.
Looking ahead, the company is following a new stock inventory model. This involves “buy less with faster delivery times and more flexibility.” This should certainly help avoid being left with large levels of stock (a problem in the past), which also ties up cash and hurts overall cash flow.
Smaller changes are also having a big impact. The report talked about restricting Buy Now and Pay Later options, which has reduced the rate of product returns. In turn, this helps reduce old inventory that has been returned and must be resold.
Limited space to fall further
Another key factor supporting the share price is the fact that it has already fallen so far. In early September I said I thought the stock was becoming undervalued.
One reason to support this is the fact that Mike Ashley in Fraser Group is buying shares in the business right now. He is an astute investor who knows the retail market well.
So despite the revenue decline in the latest results, I think some investors are reluctant to panic sell because the share price is neither inflated nor overvalued. If anything, I think the share price could rise in the coming days as the results sink in more fully.
Of course, it’s still too early to say whether the cost-savings program and new initiatives will be a game-changer. I don’t expect the stock to hit 52-week highs above 1,000p any time soon.
But given the green shoots emerging, I think investors might consider dipping their toes into the water with a small investment.
