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Asos - Strong First Half Results

Steve Clayton | 12 April 2016 | A A A
Asos - Strong First Half Results

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

ASOS plc Ordinary 3.5p

Sell: 2,335.00 | Buy: 2,337.00 | Change 18.00 (0.78%)
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Underlying sales, before currency effects, rose 25% during the first half, with growth of over 30% in the US and EU. Despite the cost of Asos's well-flagged investments into their zonal pricing strategy and additional delivery options, net and gross margins both improved during the period. Profit before tax rose 18% to £21.2m (2015: £18.0m), adjusted earnings per share rose 15% to 20.3p and the group ended the period with a net cash balance of £135.9m (2015: £64.9m).

The shares jumped 5% in early trading.

Describing the first half as a good start to the year, CEO Nick Beighton highlighted the 17% growth in active customers over the prior year, now standing at 10.9m. This led to 21% growth in visits to the group's websites and increased basket sizes and order frequency.

Asos are confident of meeting market expectations for the year, aided by a £6-8m reduction in US import duties in the US, which will be reinvested into the customer proposition there. Asos are exiting their Chinese in-country operations and this will remove operating losses from future periods, after some one-off closure costs.

Branded sales rose from 52% of sales to 56% as the zonal pricing initiative improved competitiveness in international markets. Asos added 200 new brands to the roster, whilst shedding 150 to keep the overall collection fresh. Asos are now obtaining exclusivity on some branded products, differentiating their offer versus rivals.

Delivery and service options are being extended, with a free returns service, across the EU by the end of April 2016. In the UK, click and collect options are being extended to more and more locations, whilst in Europe and the US, the proportion of orders fulfilled from local facilities is growing.

Cash flow was positive, largely due to a change in supplier payment terms last year, which led to working capital delivering a £14m inflow, compared to a £12m outflow the previous year. Despite the growth in the business, inventories of stock only rose by £4m. The group's focus on "first price, right price" underpinned the margins earned.

Our View

Asos is performing strongly, almost everywhere but China, it seems. Having got to grips with local pricing, Asos are now competitive on branded products pretty much all the time in their three main territories (UK, EU & US). The results are pretty clear, sales are racing ahead and branded products are forming a bigger part of the sales mix.

The group are executing well; new warehousing and returns facilities are springing up at home and abroad, with no impact on service levels, quite the opposite in fact. Next Directory have previously said that the online fashion sector was becoming more competitive, as rivals caught up on service levels. You can see the catching-up going on in real time at Asos, with their delivery and returns service improving month by month.

Crucially, Asos are now managing this without any further impact on their operating margins, which now look to be steadying after a period of decline.

No-one could call the stock lowly rated, on circa 65x prospective earnings, but it has been even more highly rated in the past. Asos offers a very attractive pace of top line growth, and has maintained double digit rates of expansion for many years. Ultimately, the success of Asos will depend on how long it can maintain this sort of pace, and how far it can tickle margins higher as scale builds across the business. Sales this year are set to be around £1.4bn and analysts expect them to break through £2bn in FY18.

With the business addressing the UK, the EU, the USA and beyond, £2bn still represents a very small market share. So if it can keep its competitiveness sharp, there seems little reason to think that Asos is going to be constrained in its growth, by anything other than its own ability to manage the pace of expansion, for some time to come.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.