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Momentum continues at Asos

Equity research team | 18 October 2016 | A A A
Momentum continues at Asos

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ASOS plc Ordinary 3.5p

Sell: 2,398.00 | Buy: 2,404.00 | Change 50.00 (2.13%)
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Momentum continues at Asos

Asos' full year results reveal continued growth in both retail sales and profit before tax (excluding exceptional items). Despite this, after a strong run the shares fell by almost 3% this morning.

Our View

Asos' potential is clear for all to see. Online shopping is increasingly popular with its 20-something target customer and the group has increased revenues and customer numbers at a double digit rate for a number of years. For this reason, the shares have always been highly rated, and currently trade on 70x forward earnings.

However, this doesn't mean that investors have had the smoothest of rides. Having reached a price of over £70 a share in early 2014, Asos encountered some teething problems. The pace of international expansion meant that the UK-based supply network was left supporting growth overseas, leaving Asos open to currency movements. When these moved against the group, operating margins suffered as pricing, especially on branded goods, became an issue.

With new warehousing and returns facilities springing up at home and abroad, Asos is now competitive on branded products most of the time in its three main territories (UK, EU & US). Sales are racing ahead and branded products are forming a bigger part of the sales mix.

Asos' investment in pricing may be dragging gross margins down, but the group's expansion provides the group with better economies of scale. Importantly, this means that operating margins are steadying after a period of decline. With only a small market share in the vast clothing markets of the UK, Europe and the US, there is still an awful lot of room for growth. For the time being, the group is focused on this opportunity, and so does not pay a dividend.

Although the vote to leave the EU could have an impact on consumer confidence at home, the UK makes up less than half of group revenue. Unusually for a clothing retailer, Asos pay around 80% of sourcing costs in Sterling, which should offer the UK business some insulation against the pound's weakness. In fact, the group's overseas operations should provide a currency benefit as rates are now more favourable for converting revenues earned in dollars and euros into sterling.

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.

Full year trading in detail

Retail sales increased to £1.4bn, up 26% on last year. While retail gross margins fell by 30bps to 48.5%, reflecting Asos' lower prices and increased returns, profit before tax (before exceptional items) increased to £63.7m.

The active customer base continues to grow, and now sits at 12.4m. These customers are ordering more, with total orders up 30% to 38.3m orders in the year. With 7.5m mobile app downloads this year, the group has over 10m active installs. The app is now responsible for two thirds of traffic to the site and half of all orders.

Asos added 233 new brands in the year, and now stocks over 85,000 product lines. Plans for the coming year include expansion into sportswear (having now resolved a trademark dispute) and specialist ranges in both menswear and womenswear.

The group rolled out service improvements across the group, with next-day delivery in 14 additional EU countries and more precise delivery windows in the UK.

Sales growth for the coming year is expected to be in the 20-25% region with margins broadly unchanged. Asos will accelerate investment in both logistics and technology, with capital expenditure rising to £120m-140m. A further £20m investment is expected in the Barnsley warehouse, while the Eurohub 2 facility is on track to commence live operations in March.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.