In the world of fast fashion e-commerce, few companies have had as tumultuous a journey as ASOS (LSE: ASC). Once a darling of the UK stock market, it has faced its fair share of challenges in the past few years. However, recent developments have caught my eye, and I believe the ASOS share price merits closer inspection.

A rollercoaster ride

The share price has been on a wild ride. Trading just under 443p Thursday (19 September) lunchtime, the shares have shown hints of recovery of late, climbing 7.98% over the past year.

However, it’s important to put this uptick into perspective. The price is still a far cry from historical highs of over £57 in 2021.

Signs of a turnaround?

Despite the challenges, there are some indications that it might be turning a corner. A recent announcement revealed that management has successfully slashed its debt through refinancing after the part-sale of its Topshop brand. This move not only strengthens the company’s balance sheet but also demonstrates management’s commitment to streamlining operations and focusing on core strengths.

The fact that insiders own a substantial 25.91% of the company’s shares is also encouraging, as it aligns management’s interests with those of shareholders.

I think there are several other positive factors to consider. Free cash flow has improved by approximately £240m year on year, indicating better operational efficiency. Additionally, the firm is ahead of its plan to reduce inventory, expecting stock to be back to pre-Covid levels by the end of the year. This could lead to improved margins and boost cash flow in the future.

Management is also still aiming for an ambitious 85% earnings growth in the long term, as well as 82% for earnings per share (EPS). If achieved, these targets could significantly boost profitability and shareholder returns.

Challenges remain

However, it’s crucial to acknowledge the challenges here. Recent financial performance has been mixed, with the latest results significantly missing consensus estimates. Sales in the first half of the year were around 18% lower than the same period last year, falling short of both previous guidance and those estimates.

The broader market backdrop also poses risks, including a potentially weaker consumer environment, more aggressive price competition, and ongoing supply chain disruptions. These factors could impact the firm’s ability to achieve its ambitious growth and margin targets.

Why I’m watching

Despite the challenges and uncertainties, I’m keeping a close eye on ASOS for several reasons. The company’s efforts to improve its financial position and streamline operations could set the stage for a significant turnaround if successful.

A strong market position in the fast fashion e-commerce space gives it a solid foundation for future growth. If consumer spending rebounds and the company can effectively navigate the competitive landscape, there could be substantial potential for the price to rise.

Also, the current valuation might present an attractive entry point for long-term investors willing to weather some short-term volatility. With a price-to-sales ratio (P/S) of just 0.2 times, clearly low compared to historical levels, the firm could be undervalued for now assuming it can return to consistent profitability.

So while it certainly carries risks, its recent efforts to improve its financial position, coupled with its strong market presence and potential for margin expansion, make it a compelling stock to track. It’s on my watchlist.