By James Davey

LONDON (Reuters) -Supply chain snags hammered first-half profit at ASOS and the British online fashion retailer warned its expectations for a much better second half could be disrupted by surging inflation.

Shares in the company, which sells fast-fashion aimed at 20-somethings, dropped as much as 6% in early Tuesday trading after it reported an 87% plunge in first-half adjusted earnings.

However, they bounced back to last trade over 2% higher after it said stock levels – heavily affected in recent months by industry-wide supply chain problems – were much improved.

ASOS, which had warned on full-year profits in October when parting ways with then CEO Nick Beighton, said it was sticking with its latest annual guidance – excluding the already-flagged impact of quitting Russia following the invasion of Ukraine.

But it cautioned there was a greater risk to forecasting that normal as the full impact of recent inflationary pressure on consumers was yet to be felt.

Chief operating officer Mat Dunn said he expected analysts to trim about 14 million pounds ($18 million) from full-year profit guidance of 110-140 million pounds, to take account of the withdrawal from Russia. ASOS made an adjusted profit of 193.6 million pounds in its 2020-21 financial year.

The company said its forecasts reflected an improved stock profile, the easing of comparative growth rates, the return of event and holiday-led demand, increased marketing investment and improved lead-times as supply chain pressures ease.

“We’ve opened the (spring/summer) season with a very good level of stock,” Dunn told Reuters.

“There is some uncertainty around (supply from) China, but we’re in a much better situation than we were at the start of autumn/winter.”

Dunn said ASOS had raised prices by a low to mid-single percentage in January, but not since.

“We’re making sure that our value proposition is as attractive to customers as it can be and we’ve definitely absorbed some of the inflationary pressures in order to do that,” he said.

Dunn said the process to recruit a new CEO was ongoing.

Adjusted profit before tax was 14.8 million pounds for the six months to Feb. 28, down from 112.9 million pounds a year earlier. Revenue was up 4% to 2.0 billion pounds.

($1 = 0.7685 pounds)

(Reporting by James DaveyEditing by Kirsten Donovan and Mark Potter)