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ASOS - Currency augments strong underlying growth

George Salmon | 4 April 2017 | A A A
ASOS - Currency augments strong underlying growth

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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: 2,533.00 | Buy: 2,537.00 | Change 156.00 (6.59%)
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First half results confirm continued momentum at ASOS, with Retail sales increasing 38% to £889m, including a particularly strong performance from the international business. As a result, expected sales growth for the year is increased to 30-35%.

However, ASOS says that profit before tax will be around existing analyst expectations (c.£81m) as sourcing and other structural costs increase. The shares dipped 2.8% on the news.

Our View

Online shopping is increasingly popular with ASOS' 20-something target customer, so the potential of the group is clear for all to see. Revenue growth was meteoric in the early years, and has averaged over 30% since 2011. Consequently, the shares have always been highly rated, and currently trade on 66 times forward earnings.

However, this doesn't mean that it's been plain sailing for investors. Back in early 2014, ASOS encountered some teething problems, sending the shares plummeting. The pace of international expansion meant the UK-based supply network was left supporting growth overseas. When currency markets moved against the group, pricing on branded goods became an issue and operating margins suffered.

Improvements to warehousing and returns facilities are being made at home and abroad. As a result of these projects, and following further investment in pricing, ASOS is increasingly competitive in its three main territories (UK, EU & US). This may have dragged gross margins down, but in the long run the group should benefit from improved economies of scale. We can expect more significant investment in the coming years, particularly in the US.

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. ASOS is increasingly making use of social media to drive its expansion. With 21m followers and counting across the various networks, the group is delivering impressive results here.

If it can keep its competitiveness sharp, there's little reason to think that ASOS' growth is going to be constrained by anything other than its own ability to manage the pace of expansion. For the time being, the group is reinvesting in that opportunity, and so does not pay a dividend.

ASOS featured in our recent article: Aiming for growth - three companies for the adventurous end of a portfolio

Half year results

While retail sales growth in the six months to 28 February 2017 was 38% (31% at constant currency rates) the continued investment in pricing meant retail gross margins dipped from 47.4% to 47%. Profit before tax came in at £27.3m, up 14% year-on-year.

Retail sales in the UK, still ASOS' biggest market, rose 18% to £340.8m. Reported sales growth in the EU and US was boosted by sterling's weakness, but even after stripping out the currency impact, growth was 36% and 39% respectively.

Across the group, active customers grew 29%, with average basket value and average order frequency increasing by 3 and 4% respectively. Mobile continues to grow in importance, with more than 7 in 10 visits to the site coming from mobile devices.

In the first week of March, ASOS moved over 2m units of stock to the new purpose designed and built fulfilment centre, known as Eurohub 2. This has more than doubled stockholding capacity in Continental Europe. Expansion is planned in the US too. With the group's US operations handling only 25% of all American orders, ASOS is planning to invest in a new American fulfilment centre. A decision on where this will be is expected soon.

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.