Liberum slashes target price on Asos following profit warning

Liberum said it was "not overly convinced" that a more cautious consumer was what has led to Asos' deteriorating performance, stating it thinks over-stocking, the wrong stock at the wrong price, the opening up of retail stores, and a competitive market were also likely to blame for recent trading.

The broker, which reiterated its 'hold' rating on the stock, said Asos' continuous decline in gross margin will reach a new low in 2022 and asked "where does it end?".

"Yes, supply chain is normalising but the constant reliance on promotions over the last 3-4 years is surely not good for what is supposed to be a brand-led story. On top of this, rising labour costs and increasing returns have limited the leverage benefits," said the analysts.

Liberum also pointed out that the "wide range" of Asos' new pre-tax profit guidance of £20.0m to £60.0m highlighted the "uncertainty" of the group's current business model.

"The company has returned to a net debt position and with significant capex plans ahead; FCF is non-existent for a few years. The current valuation at 0.3x forward sales is optically low but earnings visibility is clearly non-existent. No need to own the shares but some may feel it is too late to sell," said Liberum.

Reporting by Iain Gilbert at Sharecast.com