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ASOS - Marching on

George Salmon | 13 July 2017 | A A A
ASOS - Marching on

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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: 3,189.00 | Buy: 3,193.00 | Change 0.00 (0.00%)
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The four months to 30 June 2017 saw ASOS ship 16.9m orders. This helped total retail sales grow 26% to £660m, in line with analysts' prior expectations. The shares were little moved 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 62 times expected 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.

Current trading (figures at constant currency)

UK sales of £235m represents year-on-year growth of 16%, broadly in line with that seen in the first half. International sales, the majority of which are in the EU and US, increased 32% to £426m.

Across the business, customer engagement continues to improve. Compared to this point last year, ASOS has 25% more active customers, the average basket value has risen 3% and sales conversion is up 0.1 percentage points.

After falling in the first half of the year, gross margin was flat in the period.

Guidance for reported sales growth in the year to 31 August has been nudged towards the top end of the previous 30-35% range. However, ASOS expects pre-tax profits to be in line with market consensus, currently £79.4m.

Nick Beighton, CEO, commented: "This good performance has been underpinned by advances across all areas of our business including retail, technology, warehousing, delivery solutions and customer care. We have made a smooth transition to our new Eurohub 2 facility in Germany and anticipate confirming a new US logistics hub soon."

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.