The year 2021 was generally about recovery for stocks after a turbulent 2020. The FTSE 100, 250, and 350 indexes are up 12%, 14%, and 13%, respectively this year. Unfortunately for investors, Asos (LSE: ASC) did not follow the general trend. In what has been another rough year, the Asos share price is down 52%. In this article, I’m going to examine why that may have been the case and what the outlook for Asos might be in 2022.
Share price v reality
While the Asos share price has taken a dive this year, the company, on balance, seems to have done a lot of good things in 2021. You would think this would correlate with positive movement in the share price but apparently not. The purchase of the brands Topman, Topshop, Miss Selfridge, and HIIT was a good acquisition for Asos in my opinion. The £265m purchase of these established brands, which generated a combined £1bn in revenue in 2019, was definitely a market share boost. The opening of a state-of-the-art warehouse in Lichfield, Staffordshire during August of 2021, will, according to Asos, allow it to push £6bn in sales by 2023. Revenues grew by 22% year-on-year and 3m new customers were added to an active customer base of 26.4m people. So where did it all go wrong?
Supply chain woes
2021 was the year that exposed just how fragile global supply chains can be. The six-day blockage of the Suez canal threatened to bring entire industries to their knees and that was just one example. Asos, like many other British businesses, finally has to reckon with the disruption that Brexit always threatened. The company announced in October that it expected profit margins to be squeezed for the upcoming fiscal year. The reasons given included Brexit related duty costs, inflation, and post-covid blockages at international ports of entry. The expected squeeze will mean that profits before tax in the year 2022 are projected to be between £110m and £140m. This is no small squeeze considering its adjusted profits before tax for 2021 were £193m. Oh and if that wasn’t bad enough news, Nick Beighton stepped down as CEO during the same month. This was a shock to investors and the Asos share price adjusted itself accordingly.
Looking forward into 2022
Now for the crucial question. It is a virtual certainty that Asos will slow down from a growth perspective in 2022. With this knowledge in mind, is Asos still a good purchase? As we have established earlier, the Asos share price doesn’t always reflect company performance. This means that prospects on the business side may not reflect the performance of its stock. For one, this stock is trading at 17 times earnings – a real bargain for a very good business. As I outlined earlier, Asos is growing in its online reach and capacity to meet demand. They employ a relatively low amount of debt in their operations, which I like and consistently have gross profits in excess of 45%. For these reasons, this company is one I would buy at its current price.
Stephen Bhasera 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.
