Analysts at Credit Suisse have slashed their price target for ASOS PLC (LSE:ASC) as they believe the operating initiatives highlighted in the online clothing retailer's full-year results are insufficient to drive a material change to its challenges.
Maintaining their 'neutral' rating, the analysts halved their share price target to 660p from 1,250p.
As well that there is a lack of clarity on the timing and nature of structural change, they also noted that inventory levels are far too high, both cyclically and structurally, meaning the buying model needs to change.
"The renewed commercial model is a starting point for change, although details are unclear, and strategically we believe that ASOS may have to downsize in markets where it has no competitive advantage or scale, potentially including the US," they said.
"The valuation does not reflect the brand value, 26m customers or infrastructure, with the current market cap equivalent to seven years of capex, but we see little likelihood of M&A, and believe an equity raise is possible."
With "little clarity" on most metrics, Credit Suisse cut its PBT forecasts for 2023 and 2024 financial years to £6mln and £77mln, respectively, compared to consensus forecasts of £25mln and £58mln, "which would still require a big improvement in 2H".
The analysts also cut their target price for ASOS shares to 660p from 1,250p, based on DCF with 2% terminal EBIT margins and 9% WACC and 5 times EBITDA. ASOS shares currently trade at around 620p.
They noted: "The main concern surrounding ASOS’ model has been its inability to effectively manage inventory with FY22 inventory of £1,078m +34% Y/Y and 177 days of inventory vs. a 5Y average of 128 and Zalando’s 106. Higher markdowns have resulted in GM declining -619bp in the past 5Y and -379bp in the past 2Y. While 120 days for ASOS own brand (40% of sales) might be normal, there should be a way of materially reducing commitments for third-party brands which are bought locally, but this doesn’t look imminent."
The Credit Suisse analysts said they prefer Zalando SE given clarity on the model, its position as the European incumbent for multi-branded online apparel distribution and balance sheet.
They concluded: "The next catalyst for ASOS is 1Q23 sales on 12 January, and the main risks we see are that demand softens further, inventory remains elevated and markdowns accelerate."