Recovering ASOS shares take a tumble on AIM

After a spectacular run of late, the online fashion retailer had a warning for investors.

A 400% surge for ASOS (LSE:ASC) shares since April was halted today when the online retailer spooked investors with its warning about the impact of Covid-19 on its 20-something customers.

The wave of profit-taking sent shares some 11% lower to 4,802p, even though the AIM-traded stock had just delivered an underlying surplus of £142.1 million for the year to 31 August that bettered most City forecasts. And despite the current disruption, CEO Nick Beighton said ASOS was well placed to progress as “one of the few truly global leaders in fashion retail”.

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He tempered his optimism, however, with a warning that the economic prospects and lifestyles of his core customer base were unlikely to return to normal for quite some time. The company has also been forced to adapt its ranges to reflect the stay-at-home trends of 2020, but insists it won't lose its focus on its core 20-something fashion audience.

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Sportswear is likely to be one key battleground as the company looks to build on strong growth seen during the lockdown, when ASOS sales were up by about 50% in this area.

Today's annual results showed ASOS got a £45 million tailwind from Covid-19 as incremental costs were more than offset by unusually low customer returns rates. Even when excluding these factors, 2020 profits increased nearly three-fold from £33 million to £97 million, thanks in part to efficiencies from its Euro Hub warehouse automation.

Analysts were particularly impressed by year-end net cash of £407.5 million, which compared with forecasts of up to £250 million and with net debt of £90.5 million a year earlier. Having been boosted by a “proactive” capital raise of £239.4 million in April, the figure was further aided by the later than usual stock build for this winter's peak trading.

ASOS is well placed for that period, with warehousing capacity back to normal levels despite the need to maintain social distancing. Pent-up demand meant the final quarter of the last financial year saw sales in the UK surge by an estimated 52%, with European and US businesses ahead 22% and 28%, respectively.

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With ASOS also reporting a solid start to the new financial year, US bank Jefferies continues to forecast a 2021 underlying profit of £130 million. This implies growth of 34% when excluding the impact of Covid-19 factors boosting today's results and leads to a price target of 5,900p.

Analysts at Investec Securities are even more optimistic with a price target of 7,520p, which would represent a return to levels seen two years ago. Investec added: “Significant cost savings point to customer profitability fundamentally improving in outer years once Covid-19 distortions dissipate.”

At recent prices, City institutions who took part in April's heavily oversubscribed fundraising at a price of 1,560p have generated a significant profit. Retail investors were excluded from the placing, but have benefited as shares rallied on the back of the company's reassurance that it has the resources to survive a prolonged 18-month downturn.